Unconscionable help for small business

The Federal Court gets involved in unconscionability - some important decisions.

In 1998 the Federal Government widened the Trade Practices Act (TPA) to introduce new provisions dealing with unconscionable conduct insofar as they affected the business consumer. But, this was done against the background where the TPA already contained a very broad general principle whereby unconscionable conduct of a more general nature (not necessarily involving business consumers) was held to amount to a breach of the TPA. And, while no penalties were imposed under this set of provisions, very wide powers were given to the courts to deal with such unconscionable conduct. When the small business unconscionable conduct provisions were introduced in 1998 the benchmark for measuring unconscionability was $1 million. This has now been increased to $3 million. However, section 51AA, which applies to unconscionability in general terms, has no such monetary benchmark. The Federal Government gave the Australian Competition and Consumer Commission (ACCC) considerable resources to pursue small business unconscionable conduct; the ACCC decided that it needed to pursue not just that area of the law but also the general unconscionable conduct provisions of the legislation.

Using the extra resources available to it the ACCC has launched a series of cases which we will be highlighting in Law Reporter during the next three or four issues. The first of these is the recently reported decision in the Federal Court of ACCC v CG Berbatis Holdings Pty Ltd ((2000) ATPR 41-778). This case does not involve section 51AC (dealing with unconscionable conduct as far as small businesses are concerned) but rather section 51AA. When one examines this case and the result that the ACCC was able to achieve in at least one of the factual scenarios one realises just how powerful the unconscionable conduct provisions of the TPA might well be in the future (the facts are taken from the CCH Report). The case involved damages brought by the ACCC on behalf of three tenants in a shopping centre known as "Farrington Fayre Shopping Centre" - traders Roberts, Ternents and a company known as Banlon Pty Ltd. Only one of the cases brought by the ACCC was, however, successful, in relation to the unconscionable conduct provisions of the TPA.

In effect Berbatis Holdings Pty Ltd was engaged to provide services as asset manager to the shopping centre and its directors. A number of tenants were concerned about some charges levied under the terms of their leases. In January 1996 proceedings were instituted against the owners of Farrington Fayre in the Commercial Tenancy Tribunal by some tenants. In the first case decided one tenant was partially successful. The owners appealed and the tenant also filed an appeal. A number of leases in the centre were due to expire in early 1997. Discussions were held between the owners, Mr Sullivan, and representatives of the managing agents concerning the general issue of linking new leases to the withdrawal by the tenants of pending proceedings. The ACCC alleged that the corporate owners had engaged in unconscionable conduct in their dealings with the Roberts, the Ternents and Banlon Pty Ltd in contravention of section 51AA of the TPA. It was also said that they had engaged in misleading or deceptive conduct contrary to section 52 of the TPA. Their directors were alleged to have been directly or indirectly involved in those contraventions as had the seventh respondent and Mr Sullivan. Section 51AA prohibited conduct in trade or commerce that was unconscionable within the meaning of the unwritten law.

The ACCC alleged each of the tenants were in a position of special disadvantage compared with the owners; the owners and Mr Sullivan and his company ought to have known of that special disadvantage; the imposition by the owners of conditions requiring withdrawal by the tenant of legal proceedings as a condition of the grant of a new lease was unconscionable in that it took advantage of special disadvantage and was imposed in circumstances where the tenant had no choice other than to comply with it. The ACCC also alleged the respondents had engaged in misleading or deceptive conduct by representing at various times that the tenants would not have to withdraw from legal action in order to obtain a renewal of their leases. Mr and Mrs Roberts operated a fish and chip shop in the centre. They had told the centre management they were anxious to sell the business and wanted to negotiate a new lease term to assist the sale. They had a potential purchaser and also had a seriously-ill daughter contributing to their desire to sell. The ACCC sought declarations against each of the respondents (defendants) together with injunctive relief, publication of a notice in various newspapers and publications by way of public apology, orders for compliance programs to be undertaken by the various respondents and costs.

French J held that the respondents (defendants) had engaged in unconscionable conduct in relation to the Roberts. Regrettably for the other defendants the ACCC failed. In delivering his judgment French J made some important findings on the issue of what unconscionable conduct means and also how far it may extend in the context of section 51AA. After reviewing the cases in which the concept of unconscionable conduct had been discussed by the court, in particular the High Court of Australia, French J made these remarks:

"The elements of inequality, disadvantage or disability on the one hand and the unfair conduct of the stronger party taking advantage of them on the other are not, in my opinion, to be weighed up as though independent. It is conduct in context which has to be judged. A party may take advantage of the disadvantage of another without necessarily acting unfairly or so unfairly, having regard to the nature of the disadvantage, that equity would intervene. Where the disadvantage or inequality is great it may take less to discern unconscientious exploitation of it than in a situation involving less disadvantage or inequality.

In the case of an owner of land who has leased that land to another and is asked to grant a new lease upon the expiry of the first, the pre-existing relationship of tenant and landlord by itself will not give rise to a situation of inequality or disadvantage likely to attract the interest of equity. Where the tenant has consistently with the terms of the lease built up an asset by way of an on-going business which is likely to diminish significantly or cease to exist if the lease is not renewed, then the landlord may be in a substantially stronger bargaining position than the tenant. But generalisation about such relationships is dangerous. For whether there is inequality and the extent of it will also depend upon the size of the tenant, the quantum and reliability of the tenant's rental payments, the extent to which the presence of that tenant will attract others and, in the context of renegotiation, the negotiating resources and advice available to the tenant. A tenant operating a small business with a limited opportunity to sell the business may be in a particularly vulnerable position and therefore in a position approaching the level of special disadvantage or inequality which a landlord may not unfairly exploit." (at p41, 196)

French J recognised that a landlord did not have an equitable obligation (that is an obligation in fairness etc) to renew a lease simply because of the vulnerability of a tenant whose lease was expiring. But in this case, the owners did engage in unconscionable conduct because on two occasions, in May 1996 and in November 1996, on which the Roberts were looking at questions of renewal, the owners insisted upon the execution of a release clause by the Roberts as a condition of the grant of a new lease. As far as the judge was concerned it was irrelevant that the loss or detriment that might be suffered by the Roberts as a result of this action was small in money terms. The way in which the owners had acted (indirectly), was in his view unfair exploitation of the particular vulnerability that the Roberts showed in relation to the sale of their relevant business. A breach of section 51AA of the TPA had occurred and the natural persons who were parties to the contravention knew that this was the position.

To give you a better appreciation of the position as the court saw it in relation to both the Ternents and Banlon Pty Ltd (the Raitts), I will set out briefly the scenario. The Ternents' business was losing money and they were significantly in arrears of their rent. They felt pressured to relocate to another site within the centre at a lower rent. The owners proposed, as a condition of the offer for a lease for the new site, that the Ternents abandon their proceedings in the Tribunal against the owners. The Ternents refused and forwarded their lease proposal without the release clause which the agent agreed to. Subsequently, however, the Ternents discovered that the new draft lease still contained the release clause. Upset with the owners, the Ternents broke off negotiations and withdrew their offer to lease. The agents asked Mr Ternent to reconsider and informed him that they could "delete anything he did not like". Mr Ternent refused. French J was not convinced that the agents would have insisted on the inclusion of the release clause in the new lease that was to be granted to the Ternents. In his view there did not appear to be any unfair exploitation of their bargaining inequality. The Ternents, in his view, did not feel constrained to accept the condition and in fact did refuse it.

In the third case, Mr Raitt (through Banlon Pty Ltd) and the owners were negotiating the rental he was going to pay under the new lease and the possibility of expansion of his premises. Mr Raitt was forwarded the Offers to Lease that contained the release clauses but he misinterpreted the reference to the release clauses. He thought that they referred to releases by tenants, part of whose premises he was going to take over. Before the new leases were entered into, Mr Raitt lost the tenancy of his premises because he was outbid by another person.

Justice French was satisfied that Mr Raitt has lost the tenancy of his premises because he was outbid by another person. There was never any suggestion of a release clause applying and while Mr Raitt suffered financial loss, this was not due to the unconscionable conduct.

In this case, French J (a judge generally regarded as more sympathetic to applicants in cases such as this) was able to distinguish and differentiate between three different sets of respondents, is a good example of the flexibility and the scope of the new provision on unconscionable conduct. As noted earlier in succeeding issues we will show how section 51AC also provides opportunities for small business to benefit from the operation of the unconscionable conduct provisions of the TPA. This area of the law will become much more significant not just to consumers but to small businesses as well.

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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.