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in how Legislators, Courts, and Legal Practitioners Approach Unconscionable Conduct and Good Faith

high_road_intro.jpgby Professor Bryan Horrigan1

This paper gives a telescopic synopsis of the major themes, developments, and issues that surround good faith and unconscionable conduct in commercial transactions. For those who need more than this for study or work purposes, click to download pdf of the full document.

Summary of Paper

The law and practice surrounding unconscionable business conduct and good faith in commercial contexts is a controversial topic at the best of times. This topic is especially relevant for an audience comprising solicitors, barristers, judges, and academics who respectively litigate, advocate, adjudicate, and educate in this field of commercial activity. Recent legislative reform initiatives, test case litigation, and other regulatory developments have significant practical implications for advice, transactions, and judgments in both consumer and business contexts.2 For some time, these developments and implications have occupied the attention of federal and state legislatures, courts at all levels throughout Australia, barristers’ chambers and law firm offices, and various business and industry sectors.

Unfortunately, current debates in this field of law and practice often generate more heat than light.  Major controversies of the present or recent past include the following: (i) differentiating unconscionable conduct’s different meanings under statutory and non-statutory law; (ii) legislatively defining ‘unconscionable conduct’ and ‘good faith’; (iii) introducing legislative principles or examples of unconscionable conduct; (iv) universalising good faith in the franchising industry and other business sectors; (v) accommodating good faith through appropriate contractual drafting techniques; (vi) unpacking the relationship between good faith in contract and good faith as a listed indicator in statutory unconscionability; and (vii) the treatment of unconscionable conduct and good faith within broader moves towards a national contract law regime. 

The relationship between good faith and unconscionable conduct in commercial agreements now operates on at least six different levels.  First, both good faith in contract and statutorily proscribed unconscionable conduct are chief vehicles through which legal notions of fair play are translated into business and consumer dealings.  Secondly, from the transactional standpoint of a commercial drafter, litigator, or judge, there are issues to be explored in grappling with the range and limits of contractual devices in dealing with both unconscionable business conduct and deficiencies in good faith.  Thirdly, and still from a transactional standpoint, there is now a need to explore the intersection between good faith and unconscionable conduct from the perspective of good faith deficiency as a listed indicator of statutory unconscionability in two of the most important pieces of economic regulation in this country – namely the Competition and Consumer Act 2010 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth). The incorporation of both good faith and unconscionable conduct in these regulatory schemes for statutory unconscionability must now be understood and applied in the wake of recent and significant amendments to statutory unconscionability affecting both Acts.

Fourthly, claims in pleadings might be framed alternatively in terms of breach of an implied/express term of good faith, breach of good faith as an indicator of statutory unconscionability, and fulfilment of other indicators of statutory unconscionability.  Recent cases illustrate the possibility of pleading good faith and unconscionable conduct in the alternative or in connection with one another.3  Fifthly, in terms of a holistic approach to rationalising or even recasting some discrete but related areas of law in this field, more attention must now be paid to both the vertical and horizontal dimensions of the doctrines and principles underpinning good faith in contract law, statutory and non-statutory unconscionability (including reference to good faith), and otherwise unconscionable and unconscientious exercises of contractual rights (especially where proprietary interests are at stake).  Finally, both good faith and statutory unconscionability figure in the landmark national review and possible reform of contract law by the Australian Government.4

In short, the combination of recent reforms to statutory unconscionability, multi-tiered drafting approaches and client-focused options on good faith, and ongoing ‘test case’ litigation and action from corporate, financial, and consumer regulators in this area requires everyone to have a more sophisticated approach to the law and practice of unconscionable conduct and good faith in commercial transactions than might have prevailed until fairly recently.  The multiplier effect of ongoing litigation in a variety of related contexts, recent governmental reform of statutory unconscionability, and enhanced enforcement powers for official regulators results in a smorgasbord of untested issues for advice, litigation, and other regulatory action.  Accordingly, this area is likely to maintain a trajectory that is not universally welcomed by big business and those who advise or represent them, while also providing more argumentative and litigious opportunities for small business, consumers, and their legal representatives.

Ongoing and Future Litigation and Regulatory Action – A Brief Guided Tour

Overview of Recent, Ongoing, and Potential Litigation

Hardly a week or month goes by without yet another significant decision about one or both of unconscionability and good faith.5 For recent and local evidence of this trend, we need look no further than 2011-2012 court decisions on these topics in the jurisdiction where this presentation is being given.6 In the wake of the global financial crisis (GFC), cases have worked their way through the courts on unconscionable conduct and related issues in the class action on bank fees against the ANZ Bank,7 the ‘margin call’ litigation in the Goodridge case and others,8 the Storm litigation and regulatory action,9 the practices of asset lending and ‘low-doc’ loans, the improper brokering of business loans that avoid consumer protections,10 and various other drivers in an environment of volatile markets, corporate failures, reforms directed at responsible lending, tighter financing and credit conditions, and heightened regulatory attention to the preconditions for competitive and fair markets. Might some pre-GFC/post-GFC recalibration of credit and financing conditions come into view here, for example, at least where concessions are extracted that fall outside legitimate commercial interests and the preconditions for statutory unconscionability are otherwise met?

Even major corporate deals in takeovers and due diligence contexts need to assess risks associated with regulation of unconscionable conduct and bad faith. Arguments grounded in either or both of those notions might piggy-back an official ruling that confirms a company’s market power,11 in claims that such market power has been used in unconscientious advantage-taking or exploitation of bargaining power, non-disclosure of essential information, or the exercise of rights with mixed motives.12 While a corporate acquirer might not have any problems of its own from these twin risks, a corporate target might have unexposed risks of unconscionability or bad faith buried in its agreements, procedures, and past behaviour towards its own contractors, which is not as easily discoverable in due diligence as other matters. A competitive bid process might be conducted in a way that risks being characterised as unconscionable or in bad faith, such as encouraging an illusory bidding war that incurs additional costs for bidders and inflates bidding prices, in circumstances where one bid is clearly the best one all along.

Is a Wealth-Creating Shareholding Investment Business or Personal? – The Goodridge Case

If someone takes a margin loan to invest in shares as a long-term investment to cover their retirement needs, is that best characterised as a business investment or something that is personal or domestic in nature? This question was crucial to the outcome in one of the early test cases on statutory unconscionability in the context of margin calls on investments in the share market.13

The case of unconscionable conduct was pleaded as case grounded in general statutory unconscionability or, alternatively, B2C statutory unconscionability. The trial judge found it unnecessary to decide whether a ‘special disadvantage’ existed that would come under the relevant general law on unconscionable conduct that is picked up also by general statutory unconscionability. Instead, the trial judge decided that B2C statutory unconscionability is broader than general statutory unconscionability and that its requirements justified a finding of unconscionable conduct. In particular, the trial judge considered that the narrow timeline and other demands associated with forced sale of the shares were invalid, in pursuit of an interest that the assignee was not legitimately entitled to protect in taking that action. ‘Leveraged Equities thus misused its power of sale unconscientiously without any right to do so’, concluded Rares J.14

On appeal to the Full Federal Court in Leveraged Equities Limited v Goodridge,15 the trial judge’s finding of unconscionable conduct based upon B2C statutory unconscionability was rejected on two bases. First, the statutory provision relied upon by Mr Goodridge only applied to financial services of a ‘personal, domestic, or household’ kind (ie section 12CB(5)). The consideration that he signed something attesting to the funds being used for business or investment needs trumped his evidence that the funds were directed towards personal retirement needs. Secondly, on its own ‘there is nothing unconscionable in a margin lender enforcing its legal rights to protect itself against a fall in the value of its security’.16 Interestingly, in terms of future litigation, the High Court’s rejection of special leave to appeal from the Full Federal court decision included the following important caveat by Justice Gummow on behalf of himself and Justice Hayne: ‘However, we express no view as to the correctness of the conclusions expressed by the Full Court of the Federal Court as to the construction and application of section 12CB of the Australian Securities and Investments Commission Act 2001 (Cth)’.17 This judicial caveat might be important in other cases being fought under the old provisions.

One potentially important difference in the litigious landscape since the Goodridge outcome is the subsequent harmonisation of the listed indicators of B2C and B2B statutory unconscionability. At the time of the Goodridge litigation, B2C statutory unconscionability for financial services of a personal, domestic, or household nature had a more limited list of indicators than now. Although it did not make any direct difference in the circumstances of the Goodridge case, because of the trial judge’s reliance on the indicators in force at the time to make a finding of unconscionable conduct, and the appellate court’s decision on appeal that an essential precondition for B2C statutory unconscionability was not met, it might make a difference in other circumstances now to have a broader set of indicators of unconscionable financial services conduct to argue or plead. In addition, newly legislated principles of interpretation for statutory unconscionability now further condition the meaning of unconscionable financial services conduct according to such listed indicators. However, this will not necessarily assist other ‘test case’ litigants involved in GFC-related margin calls in the 2008-2009 period and beyond, because the necessary legislative amendments were not in force until early 2012.

Can Companies Claim Victimhood on Unconscionability Grounds?

In the wake of the decades-long Bell Group litigation, we are still to witness a successful invocation of unconscionability by a corporate entity or those through whom it acts. For example, there might be unconscientious exploitation of financially stressed companies without complete freedom to act in their own interests (eg because of interlocking shareholdings and directorships), where nervous financiers are extracting additional security, engineering work-out situations for financially troubled corporate borrowers, and refinancing corporate group debts in ways that involve disproportionate security burdens, an absence of corporate benefit for corporate security-providers, and possibly even a known or suspected breach of directors’ duties, thereby disentitling an outsider (such as a financier) from relying upon the statutory presumptions known as the ‘indoor management’ rule.18

What kinds of unconscionability-based arguments might be made in this context? Individual corporate directors might claim that they have been the victims of unconscionable conduct by financiers or other corporate group members, through being forced to go along with a ‘take it or leave it’ course of action for the company or in providing security for other members’ debts. A corporate borrower might face claims of unconscionability about how it has wielded its control and influence to compel finance and security arrangements that might not be to the benefit of particular security-providing companies. A corporate guarantor might claim that it is the victim of unconscientious advantage-taking, coercion, and other unfairness in being forced to provide security against its own best interests. Finally, a financier involved in such finance and security arrangements might face claims that its conduct is unconscionable or that it is visited with the consequences of unconscionable conduct by others in its orbit because of its knowledge or the benefit it gains.

The possibility of corporations claiming that they are victims of unconscionable conduct in these or other circumstances remains hypothetical but not fanciful. It has been tried unsuccessfully to this point in a number of Australian cases.19 None of them represents the last word on raising unconscionability in corporate contexts. The results of the cases to date have been influenced by available relief on other grounds; the unconscionability claim has been grounded largely in conventional notions of ‘special disadvantage’; the courts involved have exhibited scepticism about big business invoking unconscionability claims; and heavy reliance has been placed on the availability of legal advice to the corporate entity. However, at least one current and high-ranking member of the High Court (albeit at an earlier stage of his judicial career) is on record with a view that legal advice might not be fatal for what he calls ‘situational’ forms of special disadvantage, as discussed later in this paper. More significantly, statutory unconscionability extends the regulatory reach over unconscionable conduct beyond its archetypical Amadio-style form (involving ‘special disadvantage’20) and Garcia-style form (involving equity’s historical protection of wives as guarantors21). In other words, the cases to date have not exhausted the avenues of argument available in corporate contexts.

Next, anything that focuses upon imbalances of information, less than full disclosure, mixed motivations for the exercise and triggering of rights, undue benefits at someone else’s expense, and clawbacks from previous representations or commitments as circumstances change lends itself to characterisation in terms of the indicators of statutory unconscionability. The commercial or financial contexts could be as varied as: (i) attempted withdrawal from a public and unqualified commitment to a life-saving deal because of subsequent information not known to all parties;22 (ii) heavy-handed extraction of additional security or more bank-friendly financing constraints as a collateral negotiating precondition; (iii) conduct of a financier’s corporate customers that is sheeted home to the financier because of its transactional knowledge or benefit; and (iv) inadequate prior communication and consultation before exercising rights in the triangular relationships between investors, banks, and brokerage firms in margin lending arrangements for share portfolios.

Nor are the greenfield areas of unconscionability litigation limited to circumstances where one corporation claims this protection for itself against another corporation. Legal policy questions arise when the driving minds behind small businesses and big businesses alike invite courts to pierce the corporate veil, as when directors who guarantee corporate finance arrangements seek to invoke unconscionability doctrines to extract themselves from the enforcement of those security commitments.23 Additional interactions between unconscionability-based arguments and corporate law are also possible, in ways that call into play some of the basic legal safeguards relied upon by financiers in the execution of finance and security documents. These interactions between corporate law and notions of unconscionability remain to be explored fully, and in some cases it is likely that corporate law as presently constructed will be unable to carry the burden of an infusion of unconscionability-related arguments.

As the High Court has already made clear, the context of corporate third party securities is one that inherently calls into question whether or not a security-giving company is receiving adequate benefit in return, and the proliferation of third party corporate securities is not enough on its own to weaken judicial application of legal rules to such everyday corporate and financial activity.24 At the same time, another reality-check is needed here. The idea that financiers and corporate group controllers are inherently taking unconscientious advantage of their superior positions vis-à-vis security-giving companies in all conventional third party corporate security arrangements seems fanciful. Considered from the standpoint of good legal policy, there is no reason why legitimate mechanisms of corporate influence and control cannot be used to produce interlocking finance and security commitments between corporations that are beneficial and proportionate for all concerned. Nothing said here is intended to suggest that they are all suddenly open to attack in terms of unconscionability.

However, there must be room for at least some doubt where corporate benefit is lacking, and where a corporation’s decision to commit itself to finance and security arrangements is an artificially engineered rather than meaningful one. In such circumstances, a more discrete and viable attack upon finance and security arrangements might combine ‘situational’ forms of special disadvantage, relevant indicators of statutory unconscionability, and particular corporate law doctrines (eg corporate benefit), to run arguments along the lines of what the court articulated as the core complaint in very different contexts and across multiple legal bases in the settled Opes Prime litigation: ‘the banks knew (or ought to have known) [what was legally wrong] and actively went along with it’.

Still, another sobering reality-check on such possibilities appears in recent authoritative commentary and judicial analysis of such prospects. The authors of Ford’s Principles of Corporations Law express the view that allowing corporations to invoke the doctrine of unconscionable dealing and its element of ‘special disadvantage’ faces considerable legal obstacles and raises acute questions of legal policy in its ripple effects for directors’ duties and other aspects of corporate law.25 Moreover, further legal obstacles to this outcome were identified by Justice Ward in Weston v Publishing and Broadcasting Ltd in 2011.26 At the same time, it must be remembered that small-to-medium corporate enterprises can avail themselves of the statutory unconscionability regime, whose reach extends beyond the limits of the ‘special disadvantage’ doctrine and its applicability to corporations.    

Enhanced Attention to Unconscionability from Official Regulators

Numerous factors combine to pave the way for the next wave of official ‘test case’ advice and litigation surrounding unconscionable conduct.  The ACCC’s relative lack of successful outcomes earlier this decade in litigating test cases on statutory unconscionability27 is now tempered by the ACCC’s subsequent successes in court and through its other regulatory measures, as noted in later public inquiries and expert commentary.28 Earlier this year, ACCC Chairman Rod Sims made the pursuit of unconscionable conduct an enforcement priority, in these terms:29

Unconscionable conduct between businesses is another area of attention this year and one of particular concern to small business. In the past small business has sometimes felt their concerns were not given sufficient weight, and these feelings may well have had justification. Proving unconscionable conduct is, of course, a high hurdle, but where it occurs the ACCC will not hesitate in taking action.

Still, two decades after the introduction of statutory unconscionability in Commonwealth law, Australian courts are yet to decide definitively the full set of unconscionability-related doctrines embraced by statutory unconscionability, let alone precisely how conventional legal doctrines of unconscionability are spread throughout or even transcended by the various statutory unconscionability provisions.  The latest amendments to statutory unconscionability in the ASIC Act and the Competition and Consumer Act provide the ACCC and ASIC with new opportunities to test the content and boundaries of statutory unconscionability.  This was also one of the recommendations from the Expert Panel whose recommendations the Australian Government accepted in ushering in these reforms, as follows:30

Regulators should pursue further test cases to inform their guidance material, over time.  These test cases should draw on conduct in diverse industries, and should also be used to assist in the understanding of any interpretative principles introduced for the provisions.

A Refresher on Statutory and Non-Statutory Unconscionable Conduct

For those who need a refresher, the basic position on unconscionable conduct under statutory and non-statutory law is as follows. Unconscionable conduct is regulated under the general law by a variety of doctrines, including (but not necessarily limited to) the doctrines surrounding unconscionable dealings. Its classic formulation focuses upon unconscionable bargains and dealings, as exemplified in both Amadio-style and Garcia-style unconscionable conduct.

Whatever its true scope, this meaning of unconscionable conduct under the general law is picked up and applied under general prohibitions of unconscionable conduct in three major pieces of national economic regulation – expressly in equivalent provisions in the Competition and Consumer Act (relating to commercial activity in general) and the Australian Securities and Investments Commission Act (relating to financial services), and implicitly in the Corporations Act (relating to financial services licensees). Section 991A(1) of the Corporations Act provides:

Financial services licensee not to engage in unconscionable conduct

991A (1) [Unconscionable conduct]   A financial services licensee must not, in or in relation to the provision of a financial service, engage in conduct that is, in all the circumstances, unconscionable.

For ease of reference, what used to be section 51AA of the Trade practices Act now appears in section 20 of the Second Schedule to the Competition and Consumer Act, as follows:

(1) A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time.

Note: A pecuniary penalty may be imposed for a contravention of this subsection.

(2) This section does not apply to conduct that is prohibited by section 21.

This primary provision of statutory unconscionability reveals three things. It picks up the judge-made law on unconscionable conduct (ie ‘the unwritten law’). Its contraventions can result in regulatory action of various kinds (eg pecuniary penalties). It does not apply where B2B and B2C statutory unconscionability apply, which necessarily points to some commonality between them.

In addition, other provisions in the ASIC Act and the Competition and Consumer Act regulate unconscionable conduct in B2C and B2B contexts. These additional provisions cover but also extend beyond the notion of unconscionable conduct under the general law. They contain a non-exhaustive list of statutory indicators of unconscionable conduct. For ease of reference here and throughout this paper, the list of 12 indicators from section 22(1) of the Second Schedule to the Competition and Consumer Act is as follows, with characterisations supplied by the author in brackets:

(a) [relative bargaining positions] ‘the relative strengths of the bargaining positions of the supplier and the customer’;

(b) [beyond legitimate commercial interests] ‘whether, as a result of conduct engaged in by the supplier, the customer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier’; 

(c) [understanding of documents] ‘whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services’;

(d) [undue influence, unfair tactics, and duress] ‘whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the customer or a person acting on behalf of the customer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services’;

(e) [equivalent pricing and circumstances] ‘the amount for which, and the circumstances under which, the customer could have acquired identical or equivalent goods or services from a person other than the supplier’; 

(f) [equivalent treatment] ‘the extent to which the supplier’s conduct towards the customer was consistent with the supplier’s conduct in similar transactions between the supplier and other like customers’; 

(g) [code compliance I] ‘the requirements of any applicable industry code’; 

(h) [code compliance II] ‘the requirements of any other industry code, if the customer acted on the reasonable belief that the supplier would comply with that code’; 

(i) [non-disclosure] ‘the extent to which the supplier unreasonably failed to disclose to the customer: 

(i)   any intended conduct of the supplier that might affect the interests of the customer; and

(ii)   any risks to the customer arising from the supplier’s intended conduct (being risks that the supplier should have foreseen would not be apparent to the customer)’; 

(j)   [contractual terms, progress, and conduct] ‘if there is a contract between the supplier and the customer for the supply of the goods or services: 

(i)   the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the customer; and 

(ii)   the terms and conditions of the contract; and 

(iii)   the conduct of the supplier and the customer in complying with the terms and conditions of the contract; and

(iv)   any conduct that the supplier or the customer engaged in, in connection with their commercial relationship, after they entered into the contract’; 

(k) [unilateral variation] ‘without limiting paragraph (j), whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the customer for the supply of the goods or services’; and

(l) [good faith] ‘the extent to which the supplier and the customer acted in good faith’.  

In deference to the non-exhaustive nature of this list, guidance from the ACCC on avoiding unconscionable business conduct adds a final catch-all factors as follows: ‘Any other factor indicating that the stronger party acted with little or no regard to conscience’.31

Expert commentators characterise the set of statutory indicators of unconscionable conduct towards small business as one comprising a sub-set of indicators that can be grouped together and characterised in terms of good faith and fair dealing,32 and the same characterisation can be extended to the equivalent set of statutory indicators of unconscionable conduct towards consumers since the harmonisation of these two sets of legislative provisions occurs. For example, Justice Finn characterises the listed indicators of statutory unconscionability as heading ‘in the direction of proscribing unfair dealing and unfair trading’, especially ‘unfair dealing in relational contracts’.33 In his view, this is confirmed by ‘considerations that focus on possible discrimination, industry codes and standards, good faith etc’.34 The set of listed indicators having that character is joined by another set of indicators, which focus more directly upon exploitation of vulnerability through avenues of advantage-taking and coercion.35

The ultimate question concerns the range of doctrines and causes of action concerning unconscionable conduct that are picked up by statutory unconscionability.  A further question now arises as to whether recent reforms to statutory unconscionability clearly arm courts with the potential to drive the law of statutory unconscionability in a direction that does not simply cover all potential doctrines and causes of action associated with unconscionable conduct under the general law on all of the relevant levels of analysis, but rather opens up the possibility of developing a law of statutory unconscionability that goes beyond what has been developed under the general law. 

As we shall see, there have been major reforms to statutory unconscionability upon introduction of the Australian Consumer Law and since then too. These reforms have been driven, in part, by perceptions from governmental and other stakeholders about the reticence of courts to amplify statutory unconscionability beyond its constraints under the general law. 

At the same time, the most recent reforms to the statutory prohibition of unconscionable conduct must be assessed against the background of high-level judicial guidance on these provisions still remaining at a relatively early stage of development, at least in terms of authoritative High Court guidance on them. All that is currently known from the High Court’s piecemeal treatment of statutory unconscionability (including these provisions) is as follows.  Whatever else might be covered by the generic statutory prohibition of unconscionable conduct, it at least covers the equitable doctrine of unconscionable conduct relating to the exploitation of a weaker party’s ‘special disadvantage’.36  The character of the statutory provision governing B2B unconscionability relates to imposed norms of conduct, as distinct from establishing liabilities or causes of action, with failure to meet the statutorily prescribed norm of conduct attracting statutory consequences that are not to be limited necessarily by the nature of claims and remedies under the general law.37

An overly rigid translation of common law notions on causation to the broader purposes, forms of conduct, and remedial consequences covered by the Trade Practices Act (now the Competition and Consumer Act) is inappropriate, including in relation to statutory unconscionability.38  Finally, the statutory indicators of B2C and B2B unconscionability relating to reasonableness and legitimate interests are one manifestation of the ways in which the law uses notions of ‘reasonable necessity’.39 So, there is much still for the High Court to explore and settle on statutory unconscionability, just as there is much still for the Court to address on good faith in contract.

Good Faith as a Listed Indicator in Statutory Unconscionability

For more than a decade, a lack or breach of good faith has counted as an indicator of unconscionable conduct under Commonwealth trade practices and financial services laws. This area of operation covers the supply and acquisition of goods and services. Such preconditions for its operation mean that statutory unconscionability will not necessarily catch all commercial arrangements. Still, it covers a wide variety of commercial dealings and industries.

The emerging law of statutory unconscionability therefore provides a legislative dimension that complements the doctrinal dimension of good faith’s treatment under the laws of contract and equity. This relationship between good faith in contract and statutory unconscionability affects commercial drafting, advice on commercial transactions, and pleadings and submissions in ‘test case’ advice and litigation on good faith.

At the same time, there are relevant differences between these two good faith contexts. For example, as the focus of these statutory prohibitions of unconscionable business activity is upon conduct rather than contract, secondary reference to contractual content and behaviour is sometimes necessary as part of a primary characterisation of unconscionable conduct. Moreover, what might be possible in limiting or excluding good faith in contract does not translate automatically into an equivalent capacity to exclude statutorily imposed standards of conduct under such legislation. Other relevant differences include any variances between contractual and statutory remedies, and the potential involvement of a corporate regulator in investigating and enforcing the statutory unconscionability regime.

Until recently, good faith’s operation in statutory unconscionability was confined to B2B transactions, primarily in protecting small businesses from unconscionable business conduct by other businesses. However, the landscape surrounding statutory unconscionability has changed significantly with recent regulatory reforms.

Expert Commentary on Good Faith Under Contract Law and Statutory Unconscionability

In her landmark analysis of good faith in Australian contract law, Professor Peden contrasts good faith in contract with statutory and non-statutory unconscionability, as follows: 40

To suggest a close correlation between good faith and unconscionability is also more confusing than constructive. … The concept of good faith, as it is developing, is being used to implement the parties’ agreements, ensuring they remain true to their original agreement and have regard to the interests of the other party.  In contrast, unconscionability is used in a variety of ways …

More recent legislation in the form of ss 51AA and 51AC Trade Practices Act 1974 (Cth) does extend legislative remedies to common law unconscionability in certain business contexts.  However, there is no common understanding of the meaning of ‘unconscionability’ in these sections yet.  Furthermore, the fact that s 51AC lists ‘good faith’ as a factor to be taken into account in deciding whether there has been a breach does not mean that there is suddenly a close analogy between the concepts of good faith and unconscionability.  The use of ‘good faith’ in s 51AC could just mean ‘honesty’, as in many other pieces of legislation.  A further distinction is that many judges feel an obligation of good faith can be imposed in all contracts, or all commercial contracts, whereas for unconscionability to operate there usually needs to be some vulnerability, such as a special disability in the Amadio sense, or a presumed weakness (such as the weaker position of a consumer in many pieces of legislation), which limits the operation of the principle. 

Perhaps the closest that unconscionability comes to the operation of good faith is where the exercise of contractual rights is restricted in cases where it would be unconscionable to allow the party to exercise those rights … To say a party has behaved unconscionably is more difficult than to show the party has behaved in breach of an obligation of good faith. However, if good faith is taken to require objective ‘reasonableness’, then this would catch even more conduct than a test of ‘unconscionability’.

On this view, good faith in statutory unconscionability is primarily associated with honesty. Still, the differences between contractual good faith and unconscionability that Professor Peden highlights in this passage draw heavily upon the general law, especially the strands of unconscionability jurisprudence associated with the equitable doctrine of special disadvantage and the unconscientious exercise of contractual rights. The latest reforms of statutory unconscionability take another step towards disconnecting it from its limitations under the general law.

Similarly, the anomalous relation identified here between good faith, reasonableness, and unconscionability is also grounded in their use under the general law, as framed through the Carter-Peden view of implicit good faith and its baseline of honesty. As outlined above, statutory unconscionability (including its use of good faith) has a legislated scheme and operation of its own that might yet transcend these origins. The Commonwealth Parliament has undeniably linked the notions of good faith and unconscionability in statutory unconscionability, to which some legal effect must be given, especially under the High Court’s modern approach to the primacy of statutory language over preconceived notions based upon the general law.  Given that a transactional approach to commercial agreements focuses as much upon their content as the conduct surrounding them, it would make sense if the content of good faith in contract could be aligned to some degree with the content of good faith in statutory unconscionability.

The Recent Reforms in a Nutshell

What are the main changes to statutory unconscionability that progressively took effect in 2011 and 2012?  In particular, four recent changes to trade practices and financial services laws affect the operation of good faith as an indicator in statutory unconscionability, as well as statutory unconscionability more generally.

First, new principles of interpretation have been inserted from 2012, to guide courts in interpreting, developing, and applying the law of statutory unconscionability. These interpretative principles apply to the provisions of statutory unconscionability that include reference to good faith. Secondly, the listed indicators of statutory unconscionability have been reformed, in ways that sharpen the focus upon contractual content and behaviour. Thirdly, the respective lists of indicators for B2C and B2B statutory unconscionability have been harmonised from 2012. So, test cases and judicial analysis of good faith in B2C and B2B contexts can now inform each other.  Finally, assessments of unconscionable business or financial conduct now provide opportunities for pecuniary penalties, infringement notices, and other regulatory responses, which means that consideration of such questions is no longer confined solely to outcomes in court.

At the same time, statutory unconscionability is characterised by the following difficulties, all of which have a compounding effect.  ‘Unconscionability’ has more than one meaning across various departments of law.  The boundaries of its specific meanings in the statutory and non-statutory law of unconscionable conduct remain undetermined under Australian law.41  There is a range of equitable and other doctrines that draw upon specific ideas associated variously with conduct that is unconscionable and against ‘good conscience’, although legally the term ‘unconscionable conduct’ has a more discrete conventional meaning.

Statutory unconscionability is one of a number of areas of statutory law whose interpretation and application successive legislatures have decided should be characterised by bounded discretion according to a matrix of unweighted indicative factors, and hence left largely in the hands of the judicial branch of government.  Equitable notions of unconscionable conduct in general and the strand of unconscionable conduct associated with ‘special disadvantage’ in particular have to this point arguably exerted an overly strong gravitational pull upon the starting approach of courts to statutory unconscionability.42  The new principles of interpretation for statutory unconscionability in both the ASIC Act and the Competition and Consumer Act clearly send the law of statutory unconscionability in a different direction, although its full potential is yet to unfold in ‘test case’ regulatory action, litigation, and court decisions.

Interim Note

The foregoing gives a telescopic synopsis of the major themes, developments, and issues that surround good faith and unconscionable conduct in commercial transactions. For those who need more than this for study or work purposes, the remainder of this paper (click to download pdf ) explores these things in more detail. It commences next with an outline and analysis of good faith in its contractual and commercial contexts, followed by an analysis of contemporary drafting devices and client-focused options on good faith, and then ends with the current position on unconscionable conduct under the general law and major economic legislation. 


Footnotes

  1. BA, LLB (Hons) (Qld), DPhil (Oxon); Louis Waller Chair of Law and Associate Dean (Research), Monash University (2009-2012); Consultant, Allens (1994-2012); Expert Panel member for the Australian Government’s inquiry into statutory unconscionability and identified franchising behaviours (2009-2010); and Dean of the Faculty of Law at Monash University from January 2013.
  2. Here, the main emphasis is upon business contracts and conduct (ie business-to-business (B2B) transactions), with some reference along the way to relevant parallels and implications in consumer contexts (ie business-to-consumer (B2C) transactions). 
  3. See, for example, the interplay between good faith in contract and the lack or breach of good faith as an indicator of statutory unconscionability in: Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903; Automasters Australia Pty Ltd v Bruness Pty Ltd [2002] WASC 286; Clough Engineering Limited v Oil and Natural Gas Corporation Limited [2008] FCAFC 136; Weimann v Allphones Retail Pty Ltd [2009] FCA 673; Allphones Retail Pty Ltd v Hoy Mobile Pty Ltd [2009] FCAFC 85; ACCC v Seal-A-Fridge Pty Ltd [2010] FCA 525; N A Retail Solutions Pty Ltd v St George Bank Limited [2010] FCA 259; Oliver v CBA (No 1) [2011] FCA 1440; and NAB v McCall [2011] QSC 25.   
  4. Commonwealth Attorney-General’s Department, Improving Australia’s Law and Justice Framework – A Discussion Paper to Explore the Scope for Reforming Australian Contract Law, 2012.
  5. Eg Andrews v Australia and New Zealand Group Ltd [2012] HCA 30; Beerens v Bluescope Distribution Pty Ltd [2012] VSCA 2009; Tenth Vandy Pty Ltd v Natwest Markets Australia Ltd [2012] VSCA 103; Kakavas v Crown Melbourne Ltd [2012] VSCA 95; Alstom Ltd v Yokogawa Australia Pty Ltd [2012] SASC 49; Technology Leasing Ltd v Lennmar Pty Ltd [2012] FCA 709; ASIC v Australian Lending Centre Ltd (No 3) [2012] FCA 43; and Westpac v Bell Group [2012] WASCA 157.
  6. Eg Coronis v Jilt Pty Ltd [2012] QCA 66; Agripay Pty Ltd v Byrne [2011] QCA 85; Thomas v Balanced Securities Ltd [2011] QCA 258; Dowdle v Pay Now For Business Pty Ltd [2012] QSC 272; ACN 096 278 483 Pty Ltd v Vercorp Pty Ltd [2011] QCA 189; and NAB v McCall [2011] QSC 25 (drawing upon Kendell v Sweeney [2005] QSC 64). 
  7. Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30.
  8. Goodridge v Macquarie Bank Limited [2010] FCA 67 (on appeal Leveraged Equities Limited v Goodridge [2011] FCAFC 3); and Imobilari Pty Ltd v Opes Prime Stockbroking Ltd [2008] FCA 1920.
  9. Eg ASIC v Bank of Queensland Ltd [2011] FCA 1361; and Oliver v CBA (No 1) [2011] FCA 1440.
  10. Eg ASIC v Australian Lending Centre Ltd (No 3) [2012] FCA 43.
  11. Such as an ACCC clearance or undertaking for mergers and acquisitions, authorisation of anti-competitive conduct, or access ruling.
  12. Eg ‘Capping Creeping Acquisitions: Is It a Pandora’s Box for Australian Merger Laws?’ Johnson Winter & Slattery, 2009.
  13. Goodridge v Macquarie Bank Limited [2010] FCA 67; on appeal Leveraged Equities Limited v Goodridge [2011] FCAFC 3.
  14. Goodridge v Macquarie Bank Limited [2010] FCA 67 at [207].
  15. [2011] FCAFC 3.
  16. [2011] FCAFC 3 at [417].
  17. Goodridge v Leveraged Equities Limited; Goodridge v Macquarie Bank Limited [2011] HCATrans 154; see also Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 at [296]-[298].
  18. Corporations Act, sections 128-129.
  19. Eg Commonwealth Bank of Australia v Ridout Nominees Pty Ltd [2000] WASC 37; Optus Networks Ltd v Telstra Corporation Ltd (No 3) [2009] FCA 728; Weston v Publishing and Broadcasting Ltd [2011] NSWSC 433; and The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 (on appeal Westpac v Bell Group [2012] WASCA 157).
  20. Commercial Bank of Australia v Amadio (1983) 151 CLR 447.
  21. Garcia v National Australia Bank Ltd [1998] HCA 48.
  22. Cf GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd [2001] FCA 1761.
  23. As discussed generally in Pascoe, 2003.
  24. Eg Northside Developments Pty Ltd v Registrar-General (NSW) [1990] HCA 32; compare and contrast with other judges’ approach to commercial reality and third party securities more recently in Angas Law Services Pty Ltd (in liquidation) v Carabelas [2005] HCA 23. 
  25. At [14.170].
  26. Weston v Publishing and Broadcasting Ltd [2011] NSWSC 433.
  27. M. Sharpe and C. Parker, ‘A Bang or a Whimper?: The Impact of ACCC Unconscionable Conduct Enforcement’ (2007) 15 TPLJ 139.
  28. Strengthening Statutory Unconscionable Conduct and the Franchising Code of Conduct, Australian Government (The Treasury and Department of Innovation, Industry, Science and Research), February 2010; and B. Baxt, ‘New Challenges Face Competition Regulators’, The Australian Financial Review, 8 October 2010. 
  29. ACCC Chairman Rod Sims, ‘Enduring Perspectives and 2012 Objectives’, Speech to the Australia-Israel Chamber of Commerce, 2012.
  30. Expert Panel Report, Strengthening Statutory Unconscionable Conduct and the Franchising Code of Conduct, Australian Government, 2010, at p 41, Finding 2.7.
  31. ACCC, Business Snapshot: Unconscionable Conduct, published 12 September 2012.
  32. On good faith and fair dealing in this context, see: P. Finn, ‘Unconscionable Conduct?’, UNISA Trade Practices Workshop, 2006. 
  33. Justice Finn, above at pp 14-15. Beyond this statutory context, the relational nature of the commercial agreement considered in Macquarie International Health Clinic Pty Ltd v Sydney West Area Health Service [2010] NSWCA 268 significantly informed the findings of the court concerning the content of an express term of utmost good faith: see, particularly, at [144] per Hodgson JA (Macfarlan JA concurring).  
  34. Justice Finn, above at p 15.
  35. Justice Finn, above at pp 11 and 15.
  36. ACCC v CG Berbatis Holdings Pty Ltd [2003] HCA 18.
  37. Master Education Services Pty Limited v Ketchell [2008] HCA 38.
  38. I and L Securities v HTW Valuers [2002] HCA 41 at [69] and [104]; and Henville v Walker [2001] HCA 52 at [96].
  39. Thomas v Mowbray [2007] HCA 33 at [22].
  40. Peden, above at [7.7]; emphasis added.
  41. Here, primary statutory unconscionability corresponds to the general prohibition on unconscionable corporate conduct in statutory provisions such as section 51AA of the Trade Practices Act 1974 (Cth) on trade practices generally (now section 20 of Schedule 2) and the equivalent section 12CA of the Australian Securities and Investments Commission Act 2001 (Cth) on financial services in particular; B2C and B2B statutory unconscionability corresponds to the prohibitions on unconscionable conduct in provisions such as sections 51AB and 51AC of the Trade Practices Act 1974 (Cth) and the equivalent sections 12CB and 12CC of the Australian Securities and Investments Commission Act 2001 (Cth). Note that the structure and content of these old sections 51AB, 51AC, 12CB, and 12CC is different from the structure and content of the latest versions of 12CB and 12CC of the ASIC Act and sections 21 and 22 of Schedule 2 of the Competition and Consumer Act respectively, after the harmonisation of listed indicators of statutory unconscionability in B2C and B2B contexts.
  42. Eg F. Zumbo, ‘Commercial Unconscionability and Retail Tenancies: A State and Territory Perspective’ (2006) 14 Trade Practices Law Journal 165; and Zumbo, 2006b. For an example of an intermediate appellate court finding a similar fault in a trial judge’s approach to statutory unconscionability, at least in a discrete aspect of a common law approach, see: ASIC v National Exchange Pty Ltd [2005] FCAFC 226 at [30].

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