Unconscionable conduct after the Lux decision

  • Date:01 Oct 2013
  • Type:Company Director Magazine
Unconscionable conduct provisions in consumer law have not produced the expected results. Professor Bob Baxt argues that they should be dealt with in special-purpose legislation.

In opposition, the Coalition promised a “root and branch” review of the Competition and Consumer Act. Its win of government on 7 September, together with the Full Federal Court’s decision in controversial litigation involving the sale of vacuum cleaners to a number of ladies who were well over 80 years of age (ACCC v Lux Distributors Pty Ltd [2013] FCA FC 90), will ensure this review will be a significant one.

The Shadow Minister for Competition and Consumer Affairs, as he then was, Bruce Billson, stressed the need for a review of the legislation, highlighting the fact that the unconscionable conduct provisions of the legislation had not produced the kind of results small businesses and consumers may have expected in the administration of the law.

While the number of cases the Australian Competition and Consumer Commission (ACCC) has lost in this area is small, they were usually cases where the ACCC anticipated our courts would be innovative in interpreting these provisions.

When I was chairman of the Trade Practices Commission (the predecessor to the ACCC) from 1988 to 1991, I argued strongly against the introduction into the then Trade Practices Act of provisions that would allow cases of unconscionable conduct, affecting business-to-business arrangements to be brought. These were later introduced as section 51AC.

My concern was that the inclusion of these provisions would undermine the fundamental thrust of the Act.

The thrust has been described by the High Court of Australia in a number of cases on alleged “misuse of market power” as fostering activity where powerful players in the market compete vigorously with each other, without malice, or unreasonable intent, and where these actions can regrettably lead to smaller players being hurt.

Indeed, the essence of competitive behaviour will see companies jostle with each other vigorously in the market, trying to obtain a better market position and the ability to become the influential player in the market. However, as noted above, my calls were ignored. Section 51AC (now clause 18 of Schedule 2 of the Australian Consumer Law) of the Act was enacted.

My concern with the business-to-business unconscionable conduct legislation did not extend to the consumer unconscionable conduct provisions. I believe separate legislation should be used to include these approaches to legislative reform.

In the Lux case, Justice Jessup ruled against the ACCC, which had alleged that certain sales of vacuum cleaners on a door-to-door basis by representatives of Lux Corporation to five elderly women in their homes amounted to unconscionable conduct.

In essence, what happened was that the sales people invited themselves into the homes of these ladies, offered a free maintenance inspection of the existing vacuum cleaners in their homes and gave them a test run of the new model. They then persuaded the ladies to replace their current machines with a new one.

The ACCC appealed against Justice Jessup’s decision, but only in respect of three of the five transactions.

An accelerated hearing was brought on by the Full Federal Court, presided over by the new Chief Justice, Justice Allsop, sitting together with justices Jacobson and Gordon.

The decision of Justice Jessup was overturned and the matter remitted back to the Federal Court for the preparation of appropriate orders that would set out the relief to be offered to the three ladies.

One of the difficulties that has faced the ACCC – and indeed, civil litigants – in pursuing cases of unconscionable conduct is that, when it comes to both consumer law and the corporations legislation,  the courts have a tendency to read into the notion of unconscionability the need to show some not insignificant “moral turpitude” on the part of the person accused of engaging in unconscionable behaviour.

In the appeal case, the Full Federal Court examined not only the unconscionable conduct provision in the relevant legislation, but also parallel legislation aimed at enhancing the protection of consumers.

The quote below from the Full Federal Court is illustrative of the type of approach we may now expect in unconscionable conduct cases, not only in the context of consumer transactions, but also in the context of business-to-business transactions.

“The task of the court is the evaluation of the facts by reference to a normative standard of conscience. That normative standard is permeated with accepted and acceptable community values. In some contexts, such values are contestable. Here, however, they could be seen to be honesty and fairness in the dealing with consumers. The content of those values is not solely governed by the legislature, but the legislature may illuminate, elaborate and develop those norms and values by the act of legislating, and thus standard setting. The existence of state legislation directed to elements of fairness is a fact to be taken into account. It assists the court in appreciating some aspects of the publicly recognised content of fairness, without in any way constricting it. Values, norms of community expectations can develop and change over time ... These laws of the states and the operative provisions of the [Australian Consumer Law] reinforce the recognised societal values and expectations that consumers will be dealt with honestly, fairly and without deception or unfair pressure. These considerations are central to the evaluation of the facts by reference to the operative norm of required conscionable conduct” (2013) FCAFC (at [23].

The Full Federal Court was particularly critical of the fact that the sales people had used their particular position of “power” (which the court described as a deceptive use of their particular power) to gain entry into the homes of the ladies and then to persuade those ladies that they should change to the new vacuum cleaner.

Indeed, the court, in reaching its conclusions, was highly critical of the fact that the salespeople had not complied with the relevant door-to-door sales legislation, and that other aspects of their conduct in the homes of the ladies could be regarded as the subject of unacceptable behaviour.

In reaching its conclusions that the conduct represented unconscionable conduct, the court made a number of other important observations about the law and earlier cases argued by the ACCC and other parties, winning some, losing some.

It recognised the important argument that has been used as a basis for sometimes rejecting a claim for unconscionable conduct – namely the presence of “moral turpitude” having to be shown on the part of the relevant defendant.

The Full Federal Court, however, suggested that moral turpitude or moral tainting as a fundamental issue should only be considered against a recognition that the relevant conduct “is conduct against conscience by reference to the norms of society that is in question”.

It noted: “The statutory norm is one which must be understood and applied in the context in which the circumstances arise. The context here is consumer protection directed at the requirements of honest and fair conduct free of deception. Notions of justice and fairness are central, as are vulnerability, advantage and honesty” [2013] FCAFC [41].

There is little doubt that the ACCC is delighted with this decision.

The Lux Corporation, however, has since sought leave to appeal the case in the High Court of Australia.

It is unlikely that leave will be granted, but the High Court may feel it is time to deliver a definitive ruling in this area.

In any event, future cases will use this decision as a benchmark against which other assessments of unconscionability will be considered.

It will certainly be a key feature of the “root and branch” review of the law that Bruce Billson, or whoever is appointed the relevant minister in the new government, will pursue.

Interestingly, in the same week as the Lux appeal decision was decided, there was another case involving a business-to-business claim of unconscionable conduct:  ispr One Pty Limited v Telstra Corporation Limited [2013] FCA 23 the Federal Court (Justice Pagone).

In this case, the Federal Court granted an interlocutory injunction where there was a termination of a large commercial contract which, it was argued, amounted to unconscionable conduct, pursuant to clause 21 of Schedule 2 of the Australian Consumer Law.

In granting the injunction, Justice Pagone noted the often ignored decision of Olex Focas Pty Ltd v Skoda Export Co Ltd [1998] 3 VR 380 where Justice Batt, in the Supreme Court of Victoria, granted injunctive relief on the basis that the party which attempted to enforce a guarantee in the context of a large commercial transaction was engaged in unconscionable conduct.

This recent case was subsequently settled, so we do not know how the particular issues would have been dealt with when the full facts were brought before the court.

However, the willingness of Justice Pagone to rely on this ignored decision, in which the business-to-business unconscionability provisions had been recognised, is likely to prove an important development in the proposed “root and branch” review of our legislation.

Many in the business community and elsewhere genuinely believe in the need for provisions such as the unconscionable conduct provisions of the Act and corporations law.

But we would be better off if the relevant provisions dealing with unconscionable conduct were set out in special purpose legislation that clearly identified the basis on which the assessment of conduct was to occur.

The government should remove such an assessment from the Act, which is aimed at ensuring competition can occur in a vigorous and fair environment.

It may be unlikely that my “pleading” will be supported, but it is an argument that may well be made to the “root and branch” review.

Clearly, consumers and small businesses should be properly protected, but this should not occur with the undermining of the effective operation of our competition and corporations legislation.