Unconscionability given a real fillip

Beware the new danger area affecting contract law

In 1997 I predicted that the new unconscionable conduct provisions of the Trade Practices Act (the TPA) (both section 51AA and section 51AC) would become a major threat to the law of contract. Many regarded his prediction as unwarranted and the views of an academic-turned-practitioner who had perhaps had too much sun. The Olex Focas case in 1997 by the Victorian Supreme Court (Batt J) first exposed the potential for section 51AA to be extended in a wider set of circumstances than ever before. This foreshadowed the introduction of section 51AC - a provision of the TPA meant to help the small business community. Now, in three separate judgments, the range of remedies available to consumers in this area has been starkly illustrated. It is important to remember that each of these cases is based on pleadings rather than on the merits of the case. They are not cases in which the court has actually found that unconscionability exists. But what is even more important is that the court in each case said that a claim in unconscionability could be brought and should be listened to by the court. This thus exposes the defendant in each case to potential litigation. That is an important victory for plaintiffs in each case. Because litigation is there and may be pursued, there is a greater incentive to settle - reach a compromise and hopefully the matter will go away.

It is important not to underestimate the way in which these new provisions can impact significantly on the life of business. Perhaps the most important of the three cases is the Full Federal Court decision in Dai Rong-Hua v Telstra Corporation Ltd. The case was heard by the Full Federal Court (Hill, Hely and Heerey JJ). The appellant was a subscriber to a telephone service on which Telstra claimed four calls had been made in June 1998 to an overseas number at a charge of $64.88. The appellant queried those calls and said they were not made from his number. Telstra investigated the charges, said they were valid and when the appellant failed to pay the amount his phone service was disconnected. The appellant wrote to the NSW Office of Fair Trading asking for the matter to be examined. The matter was referred to the Telecommunications Industry Ombudsman. The Ombudsman asked Telstra to clarify the matter. Telstra conducted further investigations and affirmed the charges. The appellant then filed an application in the Federal Court seeking a remedy under telecommunications law. There were other claims made, but it is unnecessary to deal with those issues.

The trial judge held this was not an issue of whether the applicant would be successful in the case but rather whether the material before the court is such that the action should not be permitted "to go to trial in the ordinary way because it is apparent that it must fail". His Honour held that Telstra had established its case and that there was no case to go to trial. The appellant filed a notice of appeal. the Full Federal Court allowed the appellant to amend his pleadings further making specific claims under section 51AB of the TPA. Section 51AB of the TPA provides that a corporation shall not in trade or commerce in the supply of goods or services act unconscionably. Unconscionability depends on a number of issues (a non-exhaustive list) including the relative bargaining positions of the corporation and the consumer. Telstra argued that section 51AB did not apply to what had happened here because the aim of unconscionability was to deal with persons who were under "special disability or serious disadvantage in dealing with the other party".

The Full Court rejected Telstra's argument. Here are some extracts from the judgment which are worth noting: "The language of section 51AB is very broad. The factors listed in [the section] are expressly stated to be non-exhaustive and may arguably take the ... concept of unconscionability beyond that developed by the courts of equity. .... Equitable relief on the ground of unconscionability has traditionally turned on some vulnerability of a personal kind suffered by the plaintiff such as illiteracy, drunkenness, or emotional dependence. Arguably at least section 51AB is not so restricted." (at para 16) Section 51AB contains a list of five criteria which the court may take into account. The list, as noted earlier, is not exhaustive. The bargaining positions of the parties is clearly one of the critical criteria. This is also a critical criterion in section 51AC of the TPA inserted into the TPA in 1998 to protect small business. In that section there are a number of other criteria listed to assess unconscionability. These range from the bargaining position of parties to issues of good faith, from discrimination in terms of dealing to non-reliance on appropriate codes. In the Western Australian Supreme Court case of Media Arts Group Pty Ltd & Anor v Channel 31 Community Educational Television Ltd & Ors (17 March 2000), Master Bredmeyer in the Supreme Court of Western Australia gave section 51AC a reading which is as wide as that provided by the Full Federal Court to section 51AB in the Telstra case. Indeed, he went even further in an extensive judgment in which he recognised that section 51AC deals with matters broader than the unwritten law - matters relating to the circumstances surrounding the parties and their relationship to each other. He referred specifically to the fact that the bargaining positions of the persons were unequal and this was a criterion that was specifically nominated in section 51AC (as it was in section 51AB).

In this case he refused to strike out the pleadings and again allowed the matter to proceed to trial. The third case is a decision of the Queensland Supreme Court in Planet Securities Unit Trust v Dalrymple (31 August 1999). This case concerned a claim under the common law doctrine of unconscionable conduct and also under section 51AA which is the general provision not limited to consumers or small business in particular. In essence the case concerned an attempt by the plaintiff to enforce an interest payment under a short term bridging loan agreement. The story was simply one in which the defendants urgently needed some extra money in their business. They had a loan which carried an interest rate of 15 percent and they sought an extension of the loan under which they agreed to pay 20 percent per calendar month. The interest rate was driven by the urgency of their loan. If the interest was not paid on time then the interest would multiply. In other words they would be paying interest on interest. The rates were extremely high and this was an issue that was clearly important as far as the judge was concerned.

However, it is important to note these facts. The defendants were people in business and understood what they were doing. They had obtained solicitors' advice in relation to the new borrowing. They did not plead that they were in any way disadvantaged. Despite all of these facts, the trial judge held that the rate of interest charged was both unreasonable and unconscionable. The judge referred to the credit legislation as well as to the TPA, but more particularly to the common law. Interestingly, in finding that conduct was unconscionable he did not rely on the TPA but rather on the common law. The trial judge noted that the defendants had received appropriate advice; they were people who were in business and knew what they were doing. The parties were dealing at arm's length. Nevertheless he found the particular provision in the loan agreement was "oppressive and unreasonable". The provision of capitalisation and of interest when read in conjunction with the interest rate of 20 percent per month was unfair. Looking at all of the facts the judge came to the conclusion that:

"... the insertion into the Deed of Loan and bill of mortgage which provided for interest of 20 percent per month [although reducible] to 15 percent per month if paid on time, [was one] which had taken advantage of the defendants' special vulnerability (because they needed the loan - editor). ... I feel very strongly that there has been unconscionable conduct on the part of the plaintiffs by insertion into the Deed of Loan of provisions enabling unpaid interest to be capitalised and then bear further interest at the rate of 20 percent per month. This case shows that a lender can be extremely careful to ensure, as far as he can, that the borrower has competent independent advice and understands well the nature of the obligation and its general consequences, yet the contract of loan may amount to unconscionable dealing." (at para 26) The judge did not rely on section 51AA of the TPA, which had been relied on in other cases such as Olex Focas to make an order that the interest be reduced from 20 percent to 15 percent and that other consequential relief be awarded.

Each of these cases is quite extraordinary. They have shown the willingness of judges to take the law much further than anyone who had drafted the relevant legislation had anticipated. Although the Queensland case did not rely on section 51AA, by relying on the common law which is the basis of section 51AA of the TPA, it has clearly identified this section as having much influence in appropriate cases. Earlier cases have shown that courts are not prepared to read down the meaning of unconscionability in the statutory provisions. These three cases clearly enhance that view and make it clear that this is an area of the law that everyone is going to have to be very careful about. Even the obtaining of appropriate independent legal advice may not be enough to escape the reach of the law in this area.

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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.