Expert legal commentary: New Frontlines in Regulating Unconscionable, Unfair, and Bad Faith Business Conduct

By Professor Bryan Horrigan

 

Overview

Professor Bryan Horrigan

In the last few months since the inaugural edition of The Monash Law e-Briefing, developments have continued on multiple fronts in the regulation of unconscionable, unfair, and bad faith business conduct. The ACCC v Lux case reached its end point in the High Court. The ACCC announced proceedings against Coles for alleged unconscionable conduct towards suppliers. The ANZ bank fees case is heading to appeal. The Abbott Government finalised its panel and terms of reference for the much-publicised ‘root and branch’ review of competition law. The Government also released proposed legislation on new franchising reforms, including the introduction of an obligation of good faith in franchising agreements.

These regulatory and litigious developments are of topical interest to commercial and consumer lawyers, competition and financial regulators, and businesses of all kinds and their corporate counsel. They are also relevant for policy-makers and law-makers, public lobby groups and industry peak bodies, and academics and students who study commercial law, competition law, consumer law, franchising law, contract law, and equity.

The ACCC v Lux Appeal in the High Court

In March 2014 in Lux Distributors Pty Ltd v ACCC [2014] HCASL 55, the High Court (Justices Bell and Gageler) refused special leave to appeal in this test case on unconscionable conduct. In the court below, the Full Federal Court allowed the ACCC’s appeal from the trial judge’s decision on the conduct of vacuum cleaner salesmen towards elderly women at home. In the Full Federal Court’s assessment, the salesmen gained entry to the homes of vulnerable consumers to sell them products under the pretext of doing maintenance checks of their old products, and that pretext tainted everything that followed. Despite the trial judge’s failure to see it that way, this was clearly unconscionable conduct on a proper view of the facts, whether under the pre-2012 or post-2012 statutory provisions on unconscionable business conduct.

Given the disagreement between the judges in the courts below, a decision by the High Court to grant special leave could have fuelled debate about the adequacy of the current statutory regime for unconscionable business conduct. This is one of the crucial issues in the Abbott Government’s recently finalised ‘root and branch’ review of competition law. However, as I have argued in recent presentations to clients and lawyers at some law firms, the Lux case also has its limits in setting the future direction of the law – it was a consumer rather than small business context; it was based on the law before significant 2012 changes; and it still leaves many unresolved ‘test case’ issues in this field of regulation.

ANZ and Coles Litigation

Recently announced appeals from Justice Gordon’s decision on the class action about ANZ bank fees in Paciocco v Australia and New Zealand Banking Group Limited [2014] FCA 35 have the potential to test unconscionability-related doctrines on two fronts – namely, whether relevant bank fees were extravagant and unconscionable (and hence a penalty), and alternatively whether their imposition constituted unconscionable conduct under the statutory regime governing unconscionable business conduct. Meanwhile, in early May 2014, the ACCC commenced proceedings against Coles, alleging unconscionable conduct by Coles towards its suppliers under Coles’ Active Retail Collaboration program. According to the ACCC’s public announcement, the gist of the action concerns allegations about misleading information, undue influence, unfair tactics, and advantage-taking, amongst other matters. As such, the action potentially tests a number of statutory indicators of unconscionable business conduct. Where any of the facts straddle the pre-2012 and post-2012 periods, changes in the statutory unconscionable conduct regime could be relevant.

The Finalised ‘Root and Branch’ Competition Review

In late March 2014, the Abbott Government announced the review panel and final terms of reference for its ‘root and branch’ review of competition policy and regulation. Chaired by Professor Ian Harper, the Harper Review has 12 months in which to report back to the Government. The final terms of reference are substantially the same as the draft terms of reference circulated publicly for consultation with the states and territories.

An Issues Paper on the Harper Review was released in April 2014. Two of the Issue Paper’s stated questions for public discussion and submissions are particularly relevant to the regulation of unconscionable, unfair, and bad faith conduct by big business towards small business, as follows:

(1) ‘Are existing unfair and unconscionable conduct provisions working effectively to support small and medium sized business participation in markets?’; and

(2) ‘Are there other measures that would support small and medium sized business participation in markets?’

These questions squarely raise three potential areas of reform – namely, changes to the statutory regime governing unconscionable business conduct, the introduction of an ‘unfair contract terms’ regime for standard business contracts, and enhanced use of industry codes of conduct. The finalised terms of reference reinforce the three-fold focus upon these potential reform areas, in directing the Harper Review into ‘considering whether the framework for industry codes of conduct … and protections against unfair and unconscionable conduct, provide an adequate mechanism to encourage reasonable business dealings across the economy – particularly in relation to small business’ (emphasis added).

‘Unfair Contract Terms’ Regime for Business – A Bridge Too Far?

The previous Australian Government held back from imposing an ‘unfair contract terms’ regime upon standard business-to-business (B2B) contracts at the time that it introduced such a regime for standard business-to-consumer (B2C) contracts. However, the political ground has shifted, and the relevant laws have changed too since that decision was made. While those changes enable courts to look substantively at the terms of business contracts and how those contracts are performed, the case for an ongoing carve-out of B2B contracts from the ‘unfair contract terms’ regime is now harder rather than easier to press for big business and its advocates.

This degree of difficulty has increased because three out of four regulatory planks are already in place for equalising regulatory protection of small business and consumers. We have a long-standing statutory regime protecting consumers and small business from unconscionable business conduct. The relevant statutory indicators of unconscionable business conduct towards small business and consumers alike are now completely harmonised. An ‘unfair contract terms’ regime already applies to B2C contracts. As Professor Stephen King from the Monash Business Policy Forum argues:

(S)mall businesses often lack the resources and sophistication of big companies. This makes small business vulnerable to unconscionable and unfair conduct in the market place … But we already have laws to protect consumers from unfair contracts. Why not extend these laws to small business? 

However, the way ahead on this front for the Harper Review is not straightforward. A tension exists between two political imperatives for both the Abbott Government and the Harper Review – namely, reducing economically inefficient regulatory red tape for business, while also enhancing regulatory protection of small business. This dilemma is neatly highlighted in recent commentary on the Harper Review by Norton Rose Fulbright (‘The Greatest Australian Competition Reforms in 20 Years?’), as follows:

The draft terms of reference indicate that the Review will consider extending the unfair contract provisions (which currently apply to consumers) to small business and expanding the protections against unconscionable conduct to small business. While this may benefit small business, it does impose a greater regulatory burden overall. Much debate has also historically centred on such issues. As such, it is by no means certain that any such reforms would ultimately be recommended.

Franchising, Good Faith, and a Whole-of-Government Approach to Reform

The Australian Government has at least three reform initiatives on the books that raise issues about good faith in business dealings. These initiatives straddle different departmental portfolios and have different timelines. A whole-of-government approach is needed, to ensure coherence and consistency of regulatory treatment on this important issue.

Those three reform initiatives on good faith are as follows. First, the Review of Australian Contract Law administered by the Attorney-General’s Department (which the Abbott Government inherited from the Labor Government) must confront the controversial question of how to treat good faith under Australian contract law. Secondly, an absence or breach of good faith has been an indicator of unconscionable business conduct in both B2B and B2C contexts since 2012. Finally, following on from the Wein inquiry into franchising administered by the Department of Industry, the Minister for Small Business recently released an exposure draft of legislation that introduces good faith obligations into franchising arrangements.

Under proposed changes to the Franchising Code of Conduct, each party to a franchise agreement will be under a defined and non-excludable obligation of good faith. This inclusive definition of ‘good faith’ has three elements – namely, honesty, non-arbitrariness, and contractual cooperation. These elements correspond to what is generally accepted as the core content of good faith and related obligations under the general law of contract. A breach of the proposed obligation of good faith in franchising agreements will be an enforcement matter for the ACCC under the Code.

Where the obligation of good faith is included expressly or by implication in a franchise agreement, its breach will also be grounds for breach of contract. Decisions such as Far Horizons Pty Ltd v McDonalds Australia Ltd [2000] VSC 310 indicate that good faith obligations can be implied in franchise agreements. There are cases in 2014 in more than one Australian jurisdiction that confirm this long-standing principle for the franchising industry, such as RPR Maintenance Pty Ltd v Marmax Investments Pty Ltd [2014] FCA 409 and Video Ezy International Pty Ltd v Sedema Pty Ltd [2014] NSWSC 143.

The draft legislation still allows for courts to develop and apply the general law of contract on good faith to franchising agreements. Some courts have developed the content of good faith under contract generally to include elements that go beyond the non-exhaustive definition of good faith for franchising purposes. The most controversial extension by some courts has been to include notions of reasonableness in the meaning of good faith.

Many commercial lawyers and businesses would be less concerned about such judicial innovations in good faith doctrine if reasonableness could be viewed in terms of what the contract requires and not simply at large, and if such expansive elements of good faith could be avoided completely through effective exclusion clauses. While some courts recently are showing signs of a more nuanced approach to implications of good faith, there is lingering political, industry, and legal resistance to that development.

In light of this parallel franchising reform, the Harper Review might not single out the economically significant franchising industry for further industry-specific attention in the ‘root and branch’ review. At the same time, there are difficulties in carving out franchising from whatever other statutory or non-statutory reforms unfold concerning obligations of good faith under Australian business, consumer, and contract law. For example, the upshot of the current law and proposed reforms to this point is that there will be a core content of good faith in franchising that cannot be excluded by agreement between the parties, even though the general law will permit the exclusion of implied terms of good faith for contracts generally, at least up to a point. A question of alignment also now arises between the meaning of good faith under the general law of contract, the non-exhaustive and yet non-excludable obligation of good faith in franchising, and the meaning of good faith under the statutory unconscionable conduct regime in both small business and consumer transactions.