Quantum error: exploitation of disadvantage not required for statutory unconscionable conduct
On 19 March 2021, the Full Federal Court upheld an appeal brought by the Australian Competition and Consumer Commission (ACCC) against Quantum Housing Group Pty Ltd (Quantum). The decision clarifies that unconscionable conduct under s 21 of the Australian Consumer Law (ACL) does not require exploitation of any pre-existing disadvantage – potentially paving the way for a broader interpretation of statutory unconscionable conduct.
The appeal concerned Quantum’s conduct in relation to the National Rental Affordability Scheme. Under the scheme, Quantum entered into agreements with property investors and required those investors to engage property managers approved by Quantum. However, Quantum did not disclose its pre-existing commercial relationship with the property managers recommended to the investors.
The ACCC instituted proceedings on 29 April 2019, alleging that:
- Quantum, and its sole director Cheryl Howe, knowingly breached ss 18(1), 29(1)(l) and 29(1)(m) of the ACL by making false or misleading representations to investors about the potential losses to expect if they did not appoint a Quantum approved property manager; and
- Quantum engaged in unconscionable conduct, contrary to s 21 of the ACL by pressuring investors to terminate their existing property management agreements and retain a property manager approved by Quantum.
In a statement of facts, agreed to between the liquidators of Quantum and the ACCC, Quantum admitted to various contraventions of the ACL, including the unconscionable conduct prohibitions.
On 9 June 2020, the Federal Court ordered Quantum to pay a $70,000 penalty for making false or misleading representations to investors in breach of ss 18(1) and 29(1) of the ACL. Cheryl Howe was ordered to pay a $50,000 penalty for being knowingly involved in the conduct and was disqualified from managing a corporation for three years.
However, the Federal Court at first instance found that Quantum’s conduct did not amount to unconscionable conduct in breach of s 21 of the ACL. The primary judge based this decision on his interpretation of the majority judgements in ASIC v Kobelt  HCA 18 (see ):
[t]he majority view supports the adoption of a standard that requires exploitation of disadvantage by a party in a stronger position by conduct that is well outside the bounds of what is generally seen to be moral, right or acceptable commercial behaviour.
The allegation of unconscionable conduct was dismissed because the investors did not have an identifiable vulnerability or disadvantage.
The ACCC appealed to the Full Federal Court, arguing the trial judge erred in finding that exploitation of a pre-existing vulnerability, disability or disadvantage is required to establish unconscionable conduct under s 21 of the ACL. Quantum and Cheryl Howe elected not to participate in the appeal.
The Full Federal Court upheld the ACCC’s appeal, citing Kobelt with approval but rejecting the trial judge’s interpretation of it (see ):
we reject the proposition that ratio or seriously considered obiter dicta of a majority of the High Court, indeed, of any justice of the Court in Kobelt (other than Keane J) requires in any case that for conduct to be unconscionable … there must be found some form of pre-existing disability, vulnerability or disadvantage of which advantage was taken.
The Court held that while some form of vulnerability or disadvantage will often exist, Kobelt did not express that requirement as a matter of principle. The trial judge had therefore erred in making vulnerability a pre-requisite to establishing unconscionable conduct by Quantum.
The Court then confirmed the correct approach to assessing s 21 unconscionability claims (see ):
the task is an evaluation of the impugned conduct to assess whether it is to be characterised as a sufficient departure from the norms of acceptable commercial behaviour as to be against conscience or to offend conscience and so be characterised as unconscionable.
On this basis, the Full Federal Court found that Quantum’s conduct was unconscionable in breach of section 21 of the ACL.
This clarification could open the door to more statutory unconscionable conduct cases being brought for conduct directed towards customers or businesses that don’t have any identifiable disadvantage or vulnerability.
In the context of the ACCC’s public push for the introduction of an unfair practices prohibition (as mentioned in our recent blog post) to address what it considers to be a gap in what is covered by the statutory prohibition on unconscionable conduct, it is a good reminder to businesses that their commercial behaviour to all customers and suppliers – not just vulnerable ones – must not transgress community expectations or acceptable norms.
This article was written by Joe McQuillen and Sarah Tyrrell.