A clear definition

  • Date:01 May 2015
  • Type:Company Director Magazine
Professor Bob Baxt asks whether the concept of “unconscionability” is easier to establish after a recent federal court decision.


The concept of “unconscionability”, which was introduced into the Australian competition law (then the Trade Practices Act) in the late 1980s, and later introduced into a range of other legislation including the Corporations Act has had a very chequered “ride” in the courts. Both the federal court of Australia and the state supreme courts, as well as the high court in one little “episode”, have had a few things to say about the meaning of unconscionability.

Often the plaintiff is a regulator suing on behalf of persons who allege that they have been taken advantage of by a more powerful player in the market. It is important to note developments in this area, as the unconscionability remedy is not only available in the context of consumer claims in a strict consumer situation, but also, as a result of important amendments made to the competition laws in the late 1990s, in a small business scenario. It is also a significant part of the Competition and Consumer Act (the CCA), and has most recently been carefully considered by the Harper panel.

For reasons that are not persuasive in my respectful view, the former Chief Justice Spigelman, in what has become an influential decision, Attorney General (NSW) v World Best Holdings Ltd [2005] 63NSWLR557, ruled that, unless the statutory prohibition of unconscionability was “tempered” by additional judicial requirements, the law of contract was seriously at risk. In particular, he found that “moral obloquy” needed to be found in order to find unconscionability. Many courts have, since that decision, accepted the proposition that the regulator or a civil plaintiff had to show that moral obloquy existed in the behaviour of the defendant in the relevant transaction, in order to establish unconscionability. For example, Justice Jessup in the Lux case, at first instance ACCC v Lux Distributors Pty Ltd [2013 FCA47] ruled that the Australian Competition and Consumer Commission (ACCC) had failed to establish that unconscionability existed in certain transactions between salesmen acting for the Lux Distributor Company who sold vacuum cleaners to elderly ladies. Justice Jessup relied on the failure of the ACCC to establish that moral obloquy was present in the relevant sales transactions.

The full federal court, on appeal (ACCC v Lux Distributors Pty Ltd [2013] FCAFC 90) reversed the decision of Justice Jessup. Chief Justice Allsop, on behalf of the court, diminished the importance or even significance of the concept of moral obloquy in evaluating whether unconscionability existed in the relevant case.

That decision has been applauded by regulators and consumer advocates. Also, since that decision, Justice Gordon in the consent judgment in ACCC vs Coles Supermarkets Australia Pty Ltd and Anor (2014) FCA 145 suggested that the concept of unconscionability may well be applied in business transactions involving large organisations dealing with smaller suppliers but, as this was a consent decision, the issues were not argued in the court.

Narrow adaptation
Despite these developments, for those who wanted to see a broader and more robust interpretation of the concept of unconscionability, the Victorian court of appeal, one month after the full federal court decision in Lux, in the case of Director of Consumer Affairs (Vic) v Scully (No. 3) [2013] VSCA292 (Scully), adopted the narrower and quite restrictive interpretation of unconscionability by requiring moral obloquy to be established in the behaviour of the defendant.

Also, while the high court did not have to decide the issue specifically in Kavakas v Crown Melbourne Limited (2013) 250CLR392 (Kavakas), it toyed with the idea that moral obloquy, or matters akin to that vague concept, were relevant in evaluating unconscionability.

Very recently, Justice Murphy in the federal court of Australia in Australian Competition & Consumer Commission v South East Melbourne Cleaning Pty Ltd (in liq) (formerly known as Coverall Cleaning Concepts South East Melbourne Pty Ltd) [2015] FCA25 (South East), ruled that the full federal court interpretation of unconscionability in Lux  should be followed in assessing whether unconscionability existed in the facts presented to the court in that case. The facts of that case are relatively simple: the relevant company offered certain franchisees an amount of work, which would enable them to earn significant monthly amounts, if they were able to provide certain cleaning services. It was suggested by the franchisees that the contracts offered to them by the company contained misleading or deceptive statements, false or misleading representations and amounted to unconscionable conduct as the company was not presenting the true picture. The company was in fact unable to deliver the relevant amount of work to the two franchisees and had also arguably failed to pay them for the services they had already provided.

It is unnecessary for the purposes of this column to discuss the way the judge finally arrived at a verdict. What is relevant is that, after considering the relevant facts and the arguments on how the relevant conduct should be interpreted, Justice Murphy ruled that it was not only misleading or deceptive and amounted to misrepresentation, but that it also amounted to unconscionability. In doing so, he once again played down the significance of moral obloquy. He noted that schedule 22 of the Australian Consumer Law (ACL) which is part of the CCA, in introducing the concept of unconscionability, indicated that the court could take into account a non-exhaustive and non-prescriptive list of items that might assist. These included inequality of bargaining power as well as a number of other matters. The courts were not constrained by the list in assessing unconscionability.

Justice Murphy ruled that, while notions of moral obloquy or moral tainting might be relevant, it “must be recognised that it is conduct against conscience by reference to the norms of society that is in question” (quoting Lux at [41]). His honour added: “The task of statutory construction must focus on the text of the statute and a number of the factors in schedule 22 of the ACL do not necessarily involve dishonesty, sharp practice or conscious wrongdoing…While conduct involving dishonesty, sharp practice or conscious wrongdoing is no doubt unconscionable, conduct which does not involve those factors may still be regarded as unconscionable. Substituting a test of  ‘a high level of moral obloquy’ for the standard of unconscionability is of doubtful assistance in determining whether the statutory prohibition has been contravened” (South East at [116]). Justice Murphy relied on Lux as well as on the important NSW court of appeal decision PT Limited v Spuds Surf Chatswood Pty Ltd [2013] NSWCA446.

It is vital that our courts do not arrogate unto themselves the power to change the meaning of what parliament has intended in enacting provisions, such as the unconscionable conduct provisions of the relevant legislation, because of certain biases. There was no justification, nor need, in my respectful view, for Justice Spigelman, or other judges, to fear that the law of contract would be obliterated or somehow watered down by the new remedy. There have been many challenges to the law of contract over the years and the courts have provided important exceptions and rulings that have led to the law of contract and its interpretation, being adapted to the needs of the current economic and social climate relevant to the court decision.

Despite this series of decisions in the federal court, regulators and other litigants still face the Victorian court of appeal decision in Scully as well as the obiter dicta comments of the high court in Kavakas. Until these are adequately challenged, and dealt with by a court of higher standing than the federal court at first instance (with due respect to Justice Murphy), or at least until the high court has a chance to deal with these issues specifically to clarify the importance of not watering down the concept of unconscionability by references to such concepts as moral obloquy, we still run the risk that the remedy will not be given its proper interpretation.

The Harper panel did not recommend any changes to the law in its final report. It is anticipated that our regulators will be emboldened by the recent decisions to bring more cases, where appropriate, to seek remedies for the disadvantaged who may have been unfairly treated.