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| Professor Bryan Horrigan |
Dean, Faculty of Law, Monash University
The Bottom Line
Unconscionable business conduct towards small business and consumers is a growth area for regulatory reform as well as ‘test case’ advice and litigation. So, what should the Abbott Government’s ‘root and branch’ review of competition law (‘“root and branch” review’) do with the regulation of unconscionable business conduct towards small business? The Government’s draft terms of reference for this review clearly signal that reforming business-to-business unconscionability and extending the ‘unfair contracts regime’ to small business are both clearly on the agenda of possible outcomes. These two areas of possible reform are linked, in ways outlined in this comment.
Monash Business Policy Forum’s Agenda-Setting Contribution
In November 2013, the Monash Business Policy Forum (whose Co-Directors are former ACCC head and Monash Professorial Fellow, Graeme Samuel, and former ACCC Commissioner, Professor Stephen King, and whose Board also includes the author) published an agenda-setting paper to inform the ‘root and branch’ review. Co-authored by Graeme Samuel, Stephen King, and Herbert Smith Freehills Partner Chris Jose, with contributing comments from the author, this paper has attracted detailed analysis and public comment from leading law firms and from the business community.
In its public policy paper, the Monash Business Policy Forum outlines three alternative ways forward on regulating unconscionable conduct towards small business. Those three alternatives are: (a) better definitional delineation of unconscionable conduct within the existing statutory regime; (b) revisiting presumptions and indicators of unconscionable conduct, and other means of changing the structure and content of the existing statutory regime; and (c) awaiting the outcomes of recent legislative reforms and regulatory test cases to take root. The paper’s authors recommend that ‘(t)he Review needs to consider the alternatives for further reform of the laws on unconscionable conduct including the option of allowing the most recent changes to the law to “take their course”’. The ‘root and branch’ review’s draft terms of reference allow room for this recommendation to be adopted.
The ‘root and branch’ review itself must be evidence-based and holistic in its evaluation of these options. Consider in turn each of those fundamental KPIs for the ‘root and branch’ review.
Evidence-Based Assessment in the ‘Root and Branch’ Review
First, being ‘evidence-based’ means taking proper stock of the law as it now is. The decision to change or maintain existing regulation of unconscionable business conduct is ultimately a public policy question for which the current law provides no inherent or definitive answer, one way or the other. In other words, neither the judge-made law nor the statutory law of unconscionable conduct supplies an innately correct legal value-judgment on where to strike the perfect balance in protecting small businesses from the unconscionable conduct of others.
None of this defends the current law against any demonstrated inadequacy in protecting small business. Nor is the current law free from the impact of previous legislative compromises and judicial policy choices, some of which could have been better. The judge-made law has been designed and developed to deal with the extremes of commercial behaviour, and the existing statutory regime governing unconscionable business conduct is both under-used and only partially tested by court decisions to date, and also still in evolutionary development after recent reforms. However, in the end, claims about the adequacy of legal protection for particular stakeholder groups are political claims on all sides of the debate.
Regulatory (including adjudicated) outcomes, anecdotal evidence, and public submissions on instances of unconscionable business conduct must be evaluated as collective evidence that does or does not demonstrate a critical mass of regulatory failure in protecting small business from abusive, unconscionable, and unfair conduct. The last thing everybody needs is a review whose public submissions and final recommendations simply rehearse well-trodden old ground and fixed stakeholder positions on all sides, without adding reliably to the evidential, legal, and policy bases for the way forward. One partial means of avoiding this trap is for the ‘root and branch’ review to take the draft terms of reference at their word in giving due account to previous work in related public inquiries, including the 2009-2010 review of unconscionable business conduct and franchising behaviours, co-authored for the Australian Government by the author.
Public calls that urge or resist swinging the regulatory pendulum back towards small business must also be assessed against the impact of recent changes that are yet to work their way fully through the business, legal, and regulatory communities. In the last few years, the Australian Consumer Law (which contains both the ‘unfair contract terms’ regime and the ‘unconscionable business conduct’ regime) has been successively amended to do each of the following: (i) insert additional indicators of unconscionable conduct; (ii) prescribe new principles of interpretation for unconscionable conduct regulation; (iii) harmonise the statutory indicators of unconscionable conduct towards small business and consumers; (iv) enhance the focus upon the substantive terms and performance of contracts (and not just pre-execution conduct); and (v) extend new regulatory powers for pecuniary penalties and infringement notices to unconscionable business conduct. The ‘root and branch’ review cannot properly evaluate the need to extend the ‘unfair contract terms’ regime from consumer protection to small business protection without taking due account, for example, of the 2012 harmonisation of the statutory indicators of unconscionable conduct in both contexts, as well as the inclusion of the terms and performance of a business contract in judicial and regulatory assessments of unconscionable conduct.
Relevance of ACCC v Lux Distributors
Test cases of the collective impact of these reforms are still winding their way through legal advice from law firms, investigation by official regulators, and court judgments across all Australian jurisdictions. In its early 2014 review of the commercial litigation landscape, an international law firm lists judicial evaluation of unconscionable conduct as one of the Top 10 developments in Australian commercial litigation in the past year. However, none of the ACCC’s enforcement action, the Full Federal Court’s decision, and the High Court’s consideration of the appeal in ACCC v Lux Distributors Pty Ltd [2013] FCAFC 90 solves the problems for small business or even represents the complete word on unconscionable business conduct. An application for special leave to appeal the Lux decision was filed in the High Court in September 2013.
The Lux decision concerned vacuum cleaner salesmen entering the homes of vulnerable consumers under the pretext of doing free maintenance checks for them but with the underlying purpose of selling them new products. A clearer case of unconscionable conduct is harder to imagine on the facts. Still, as I have argued recently in a new national seminar series on commercial law topics within the Federal Court’s jurisdiction, the Lux decision is limited in its scope as a test case of the law on unconscionable business conduct, given that its facts predated the 2012 legislative reform of this field (which included new principles of interpretation and the harmonisation of the statutory indicators of unconscionable conduct) and in that it involved a consumer rather than a small business context.
If the High Court takes the case and overturns the decision, all bets are off for the ‘root and branch’ review, in the sense that such an outcome would itself demonstrate the inability of the statutory regime to provide adequate protection from unconscionable business conduct. In that event, the ‘root and branch’ review could justifiably recommend a different statutory scheme. However, if the High Court is true to its past practice of taking only viable test cases and deciding them only on the limited basis needed for their resolution, it should not concern itself with resolving residual legal questions about the quality of moral tainting that conduct must possess under the statutory regime to qualify as unconscionable conduct. This is despite the differential attention given to that issue in two recent intermediate appellate court decisions in two different jurisdictions – the Lux decision in federal jurisdiction and the decision of the Victorian Court of Appeal in Director of Consumer Affairs Victoria v Scully [2013] VSCA 292. For reasons that I have argued elsewhere, much (but not all) of the debate about commercial morality in this field is riddled with loose and decontextualized analysis [1] .
Holistic Approach to the Review and the Example of Good Faith
Finally, taking a ‘holistic’ approach to the ‘root and branch’ review is a multi-pronged imperative. Indeed, it is effectively mandated by the Government’s call in the draft terms of reference to consider the collective impact upon small business of industry codes of conduct, unfair contract terms, and unconscionable conduct (see Item 3.3.4). Moreover, as the draft terms of reference foreshadow, any changes to the Australian Consumer Law will have a knock-on effect for financial services regulation under the equivalent provisions governing unconscionable conduct and unfair terms in the Australian Securities and Investments Commission Act. So, banks and other financial services providers will be directly affected by any regulatory changes resulting from this review, and therefore have an equal stake in the consultation and submission processes that follow.
While the ‘root and branch’ review focuses primarily upon business, and the draft terms of reference are careful to confine the review’s impact upon the Australian Consumer Law, there are potential knock-on effects for consumers as well, in at least two ways. First, as the Monash Business Policy Forum paper explains, the abuse of market power by big business not only leads to anti-competitive outcomes but can also affect consumers too. Secondly, given the recent harmonisation of the statutory indicators of unconscionable conduct in business and consumer contexts, any changes or additions to those indicators to enhance small business protection also affect consumers too.
Key contentious issues cut across various related inquiries and fields of business regulation and practice, so the ‘root and branch’ review must avoid tunnel vision. For example, the proper treatment of deficiencies of good faith in business dealings is one of the recurring flashpoints in reviews of unconscionable conduct and unfair contract terms. An absence of good faith is an issue in judge-made and statutory laws affecting business and consumer contracts. It is an issue in the Australian Government’s response to the Wein inquiry on the Franchising Code of Conduct. It is an issue in the Australian Government’s national contract law review. It is an issue in international commercial regulation, of the kind perhaps contemplated by encouragement in the draft terms of reference for the ‘root and branch’ review to consider relevant overseas experience.
Finally, good faith deficiency is an important statutory indicator of unconscionable conduct in its own right. Indeed, as I argue in a recent publication, corporate and banking clients who have a ‘good faith’ problem really have a double-barrelled problem under the law of contract and the legislation regulating unconscionable conduct (at least where the other statutory preconditions are present), for which no adequate drafting remedy is available.
Legal advice to clients is deficient if it fails to cover both dimensions of good faith where applicable. Similarly, the Abbott Government’s ‘root and branch’ review will not achieve its worthy aims without due attention to the two dimensions of evidence-based and holistic regulatory review that are outlined here.
[1]‘Postscript’ in B. Horrigan, ‘New Directions in How Legislators, Courts and Legal Practitioners Approach Unconscionable Conduct and Good Faith’, in J. McKenna QC and H. Jeffcoat (eds), Queensland Legal Yearbook, 2012, Queensland Supreme Court Library. This published version of the paper updates the web-based version of the presentation linked to below.
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