Legal Principles Governing Unconscionability

In the recent decision of Aboody v Ryan [2012] NSWCA 395 the Court of Appeal, comprising Bathurst CJ, Allsop P and Campbell JA, considered in some detail the governing general principles in respect of relief against unconscionable dealings. Allsop P (with whom Bathurst CJ and Campbell JA agreed) said (at [62]) that these principles were to be found in the well known cases of Blomley v Ryan (1956) 99 CLR 362, Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, Louth v Diprose (1992) 175 CLR 621 and Bridgewater v Leahy (1998) 194 CLR 457. The facts of particular cases have unsurprisingly been important catalysts in the development of principle in this area.

The President endorsed the expression of principle in these High Court cases but cautioned against introducing rigidity by focusing on subsequent single instances of the application of the principle. His Honour said (at [63]):

 [63] … there is an underlying general principle, the applications or exemplifications of which are impossible to describe fully. Thus, one should always be careful not to dwell over-technically or textually on individual expressions of general principle of normative values rooted in the remedying of injustice. It is general principle, not a precisely expressed rule, that operates. The principle is wide, and the danger in further textual definition (as opposed to exemplification or illumination) is that inaccuracy or undue restriction may be brought about… Equity’s norms and values can be expressed as by Mason J in Amadio at 461-462, or by Deane J in Amadio at 474-475, or by Dawson J in Amadio at 489…

In Blomley v Ryan Kitto J said (at 415 and 428-429):

It applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands.

…

The essence of the ground we have to consider is unconscientiousness on the part of the party seeking to enforce the contract; and unconscientiousness is not made out in this case unless it appears, first, that at the time of entering into the contract the defendant was in such a debilitated condition that there was not what Sir John Stuart called “… a reasonable degree of equality between the contracting parties”; Longmate v Ledger … and secondly, that the defendant’s condition was sufficiently evident to those who were acting for the plaintiff at the time to make it prima facie unfair for them to take his assent to the sale.

…

The fact that the defendant’s condition was the result of his own self-indulgence could make no difference, for, as is shown by Cooke v Clayworth … the principle applied is not one which extends sympathetic benevolence to a victim of undeserved misfortune; it is one which denies to those who act unconscientiously the fruits of their wrongdoing.

Fullagar J said (at 405):

The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-a-vis the other.

In Commercial Bank of Australia Ltd v Amadio Mason J said (at 461 and 462):

… relief on the ground of “unconscionable conduct” is usually taken to refer to 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 some special disability or is placed in some special situation of disadvantage…

…

…the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position.

…

Relief on the ground of unconscionable conduct will be granted when unconscientious advantage is taken of an innocent party whose will is overborne so that it is not independent and voluntary, just as it will be granted when such advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interest.

It goes almost without saying that it is impossible to describe definitively all the situations in which relief will be granted on the ground of unconscionable conduct.

…

…the situations mentioned [by Fullagar and Kitto JJ in Blomley v Ryan] are no more than particular exemplifications of an underlying general principle which may be invoked whenever one party by reason of some condition or circumstance is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. I qualify the word “disadvantage” by the adjective “special” in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.

Deane J said (at 474 and 475):

Unconscionable dealing looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so. The adverse circumstances which may constitute a special disability for the purposes of the principles relating to relief against unconscionable dealing may take a wide variety of forms and are not susceptible to being comprehensively catalogued… [T]he common characteristic of such adverse circumstances “seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other”.

In Louth v Diprose Deane J said (at 637):

… the jurisdiction of courts of equity to relieve against unconscionable dealing extends generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party to the transaction with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that special disability was sufficiently evident to the other party to make it prima facie unfair or “unconscionable” that that other party procure, accept or retain the benefit of, the disadvantaged party’s assent to the impugned transaction in the circumstances in which he or she procured or accepted it.

Crucially, taking advantage of an inequality of bargaining power, without more, will not generally be regarded as unconscionable: ACCC v CG Berbatis (2003) 214 CLR 51, 62-65 (per Gleeson CJ):

Unconscientious exploitation of another’s inability, or diminished ability, to conserve his own interests is not to be confused with taking advantage of a superior bargaining position. There may be cases where both elements are involved, but, in such cases, it is the first, not the second, element that is of legal consequence. It is neither the purpose nor the effect of section 51AA to treat people generally, when they deal with others in a stronger position, as though they were all expectant heirs in the nineteenth century, dealing with a usurer.

In Tanwar Enterprises Pty Ltd v Cauchi and Others (2003) 217 CLR 315 Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ observed at 324:

The terms “unconscientious” and “unconscionable” are, as was emphasised in Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd, used across a broad range of the equity jurisdiction. They describe in their various applications the formation and instruction of conscience by reference to well developed principles. Thus, it may be said that breaches of trust and abuses of fiduciary position manifest unconscientious conduct; but whether a particular case amounts to a breach of trust or abuse of fiduciary duty is determined by reference to well developed principles, both specific and flexible in character. It is to those principles that the court has first regard rather than entering into the case at the higher level of abstraction involved in notions of unconscientious conduct in some loose sense where all principles are at large.

The Court also observed at 325:

…to speak of “unconscionable conduct” may, wrongly, suggest that sufficient foundation for the existence of the necessary “equity” to interfere in relationships established by, for example, the law of contract, is supplied by an element of hardship or unfairness in the terms of the transaction in question, or in the manner of its performance.

More recently, in Director of Consumer Affairs Victoria v Scully (2013) 303 ALR 168, the Victorian Court of Appeal noted at 182, per Santamaria JA (with whom Neave and Osborn JJA agreed):

 [46] Seventh, s 8 of the Act applies to conduct “in trade or commerce, in connection with the supply or possible supply of goods or services”. That context is itself largely governed by existing legal principle. One is mindful of what Spigelman CJ said in the extract from World Best Holdings: “If it (the concept

of unconscionability) were to be applied as if it were equivalent to what was ‘fair’ or ‘just’, it could transform commercial relationships … The principle of ‘unconscionability’ would not be a doctrine of occasional application, when the circumstances are highly unethical, it would be transformed into the first and easiest port of call when any dispute about a retail lease arises.” The law of

contract and that of property, and the principles that constitute them, are the very things which make trade and commerce possible. Without these legal principles, and the existence of institutions such as the courts that are constrained to apply them, the strong would prevail and the weak would go to the wall. It cannot have been the legislature’s intention to interfere with arm’s length commercial transactions by reference to loose notions of unreasonableness and unfairness. The contention favoured by the appellant that conduct may be found to be unconscionable within s 8(1) of the Act if it can be found to be irreconcilable with what was right and reasonable overlooks the force of the observation of Deane J in Muschinski v Dodds that judges in equity, whose jurisdiction was discretionary, had long since abandoned recourse to undefined notions of justice and what was fair. The legislature is presumed not to alter basic common law doctrines and not to interfere with proprietary rights.

[footnotes omitted]

Where unconscionability under sections 51AA or 51AC of the Trade Practices Act is pleaded. As s 51AA(1) does not apply to conduct that is prohibited by s 51AC, it is necessary to consider the application of s 51AC.

Section 51AC(3) lists, non-exhaustively, factors to be taken into account. A number of cases confirm the view that this section is not to be read down to apply only to conduct that would traditionally be regarded as unconscionable according to equitable principles.

These factors, despite what is noted above in ACCC v CG Barbatis, do include the relative strengths of the bargaining positions of the parties. The legislation also includes as factors whether conditions were imposed that were not reasonably necessary for the protection of the legitimate interests of the supplier and the extent to which the parties acted in good faith.

In Australian Competition and Consumer Commission v Lux Pty Ltd [2004] FCA 926, Nicholson J said (at [98]):

[98] The word unconscionable is not a term of art It is not limited to traditional equitable or common law notions of unconscionability: Australian Competition & Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 at [31]. It bears its ordinary meaning of ‘showing no regard for conscience, irreconcilable with what is right or reasonable’: Australian Competition & Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301 at [44]; Hurley at [19]-[20]; Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262. What is required is ‘serious misconduct or something clearly unfair or unreasonable’: Hurley at [19]-[20]. It will be relevant whether advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgement as to what is in his or her best interests: Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461.

In Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389, Allsop P considered the meaning of “unconscionable” as used in consumer protection legislation and commented (at [291] and [293]):

 [291] Aspects of the content of the word “unconscionable” include the following: the conduct must demonstrate a high level of moral obloquy on the part of the person said to have acted unconscionably: Attorney General (NSW) v World Best Holdings Ltd [2005] NSWCA 261; 63 NSWLR 557 at 583 [121]; the conduct must be irreconcilable with what is right or reasonable: Australian Securities and Investments Commission v National Exchange Pty Ltd [2005] FCAFC 226; 148 FCR 132 at 140 [30]; Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] FCA 62; 117 FCR 301 at 316-317 [44]; Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262; factors similar to those that are relevant to the CRA are relevant: Spina v Permanent Custodians Ltd [2009] NSWCA 206 at [124]; the concept of unconscionable in this context is wider than the general law and the provisions are intended to build on and not be constrained by cases at general law and equity: National Exchange at 140 [30]; the statutory provisions focus on the conduct of the person said to have acted unconscionably: National Exchange at 143 [44]. It is neither possible nor desirable to provide a comprehensive definition. The range of conduct is wide and can include bullying and thuggish behaviour, undue pressure and unfair tactics, taking advantage of vulnerability or lack of understanding, trickery or misleading conduct. A finding requires an examination of all the circumstances.

…

[293] … Spigelman CJ in World Best Holdings at 583 [121] referred to a “high level” of moral obloquy. Whether that is too stringent and whether “significant” or “real” may be preferable need not be decided. What is required is some degree of moral tainting in the transaction of a kind that permits the opprobrium of unconscionability to characterise the conduct of the party.

Section 51AA, it relevantly provides:

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.

In ACCC v Samton Holdings Pty Ltd (2002) 117 FCR 301, the Court considered whether commercial vulnerability constituted a special disadvantage within the meaning of the unwritten law. The Court held at 321-323:

[57] The ACCC expressly conceded in its submissions, and properly so, that mere refusal to permit an option to be exercised out of time would not be likely to be the subject of a valid complaint at law or in equity in the absence of other conduct. It was said that the other conduct, notably the extraction of a large premium in the circumstances of this case rendered the conduct unconscionable.

The concession demonstrates the difficulty of the ACCC’s position. If it would not have been unconscionable for the respondents to refuse to grant a new lease and simply commence to operate a like business from the same premises themselves, how could it be unconscionable for them to agree to grant a new lease on conditions including payment of a lump sum for the assignment of lease rights from the first respondent, Samton Holdings?

[58] The failure to exercise the option within time and the position in which Mr Ranaldi found himself as a result was not attributable to the respondents. The rights which it was necessary for him to secure were lost as a result of his own inaction. He had been told before settlement of the requirement to exercise the option by the previous tenants, the Farruggios, and by the business broker, Dalziell, of ABPS Real Estate and Business Brokers. As his Honour found, during the relevant period, he had legal advice from a solicitor. The respondents acted in a way that many fair-minded people would condemn. That does not make their conduct unconscionable. The Ranaldis’ position of special disadvantage as found by his Honour, and that of Executive Bloodstock, arose out of unequal bargaining power. The respondents had the rights which they needed to acquire in order that Executive Bloodstock could operate the business and they had to acquire those rights from the respondents. The respondents were under no legal or equitable obligation to make them available.

[…]

[64] At the time they were negotiating for the grant of the second lease, the Ranaldis and Executive Bloodstock were at a serious disadvantage. They had very little bargaining power. As a practical matter, they were not in a position to make any decision other than to pay the price demanded by the respondents. It may be accepted that the categories of special disadvantage are open and may extend to what French J, at first instance in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2000] FCA 1893, called “situational disadvantage” as well as the constitutional disadvantages engendered by such disabilities as illiteracy or lack of education, illness or infirmity. It is not necessary for present purposes to explore the limits of those categories. On the findings of fact made by his Honour it is difficult to see how it would be correct to characterise the case as one of “special disadvantage” in the relevant sense. The disadvantage under which the Ranaldis and Executive Bloodstock laboured had arisen from a combination of considered commercial judgment (the decision to borrow heavily in order to purchase the business) and Mr Ranaldi’s oversight in neglecting to exercise the option in good time. These factors did not impair the Ranaldis’ ability to make a decision about the best course of action in the circumstances. At least in the case of an experienced business person there must, in our opinion, be something more than commercial vulnerability (however extreme) to elevate disadvantage into special disadvantage.

[65] Characterisation of disadvantage as “special” involves the recognition that it would be unconscionable knowingly to deal with the person so affected without regard to his or her disability, be it constitutional, in the sense of inherent, or situational, in the sense of arising from a particular set of circumstances. In effect this may require some special conduct or care which is not necessary in the absence of such disadvantage. If, for example, the disability relates to language, illiteracy or lack of education, conscientious dealing may ensure the bargaining deficit is compensated for by the provision of special assistance such as independent advice which will either enable a proper understanding of the transaction or overcome the disadvantage arising from want of a proper understanding.

In Kakavas v Crown Melbourne Limited [2013] HCA 25, the High Court considered a claim under s 51AA of the Trade Practices Act 1974 (Cth) that a casino had incited the appellant, a known problem gambler, to gamble at its casino by incentives such as rebates on losses and the offer of transport on their corporate jet. The Court in a unanimous decision emphasised the importance of the factual matrix in assessing claims of unconscionability, noting at [14] that “the decisions of this Court, in which claims for relief from unconscionable conduct have been litigated, illustrate the necessity for close consideration of the facts of each case in order to determine whether a claim to relief has been established”.

Section 51AAB provides that section 51AA does not apply to conduct engaged in in relation to financial services. The relevant provisions, which mirror the Trade Practices Act 1974, are found in the Australian Securities and Investment Commission Act 2001. In particular, section 12CA imports the prohibition on unconscionable conduct within the meaning of the unwritten law of the States and Territories.