By Professor Bryan Horrigan Report Co-Author Louis Waller Chair of ...

Overview Lead-up to the Panel’s inquiry and appointment Focus and conduct of inquiry Outcomes of inquiry Government’s response Flow-on regulatory impact and work Lessons for lawyers Caveats up front2

Terms of Reference Clarifying role v ‘clean slate’ review of statutoryunconscionable conduct (ie unfinished business from previousgovernmental inquiries) Whether ‘a statement of principles concerning unconscionableconduct’ or ‘a list of examples that all parties agree constituteunconscionable conduct’ should be included in the TPA Whether Franchising Code of Conduct needs anything more toaddress five identified and potentially problematic franchisingbehaviours3

Why Another Public Inquiry? Previous Cth/State inquiries Pre-inquiry Government decisions Correlative regulatory reform (eg ACL) and changed regulatoryenforcement landscape (eg enhanced blend of Cth/State regulators) Some proposed ACL reforms already affect statutoryunconscionable conduct (eg non-court regulatory powers, penaltiesfor unconscionable conduct) Importance of TPA and FCC to big/small business regulation Emerging research on the franchising sector and its relevantindustry components (eg motor trades, petrol, retail leasing, foodfranchises etc)4

Focus and Conduct of The Inquiry Framing the Terms of Reference Panel members (David Lieberman, Ray Steinwall, Bryan Horrigan) Working with two federal government departments (Treasury andDIISR) Internal government impact assessments and stakeholderconsultations Unconscionable conduct + 5 problematic franchising behaviours –connections Public issues paper + public submissions (including some lawyergroups) Panel consultations (eg ACCC, and ACCC’s Franchising advisorygroup) Importance of relevant legal and non-legal representative groups Confidential governmental and non-governmental submissions5

Unconscionability Relates to … Various equitable (and some common law) causes ofaction and bases for relief Statutory unconscionability under Trade Practices Act Statutory unconscionability under Fair Trading Acts Statutory unconscionability in financial services underASIC Act Unconscionable financial services licensee conduct underCorporations Act Unjust contracts laws (eg some Fair Trading Acts, NSWContracts Review Act) Related consumer credit laws Industry codes (eg Banking/Franchising Codes) State retail/commercial leasing laws6

Three Basic Forms of Statutory Unconscionability General prohibition on unconscionable conduct by corporations:- TPA s 51AA (in trade practices generally)- ASICA s 12CA (in financial services)- Corporations Act s 991A (financial services licencees) Unconscionable conduct in retail/personal/consumer contexts:- TPA s 51AB- ASICA s 12CB- Consumer Credit Code / Contracts Review Act (NSW) Unconscionable conduct in big/small business contexts:- TPA s 51AC- ASICA s 12CC- Some Fair Trading Acts- Some commercial/retail leasing Acts7

Unconscionability Under TPA s51AA & ASICA s12CA“A corporation must not, in trade or commerce, engage in conductthat is unconscionable within the meaning of the unwritten law, fromtime to time, of the States and Territories.”“A corporation must not, in trade or commerce, engage in conduct inrelation to financial services if the conduct is unconscionable withinthe meaning of the unwritten law, from time to time, of the Statesand Territories.”8

FSR Legislation & Unconscionability (s991A(1) CA)“A financial services licensee must not, in orin relation to the provision of a financialservice, engage in conduct that is, in all thecircumstances, unconscionable.”

Unconscionability Under TPA s51AB & ASICA s12CBTPA:“A corporation shall not, in trade or commerce, in connectionwith the supply [but not supply for purposes of re-supply orusing up / transforming in trade or commerce] .. of goods orservices [of a kind ordinarily acquired for personal, domestic,or household use or consumption] engage in conduct that is,in all the circumstances, unconscionable”ASICA: supply of financial services

Unconscionability Under TPA s51AC (cf s12CC ASIC Act)“A person/corp must not, in trade or commerce, inconnection with (a) the supply .. of goods or services to acorp/person (other than a listed corporation) [for purposesof trade or commerce] or (b) the acquisition or .. goods orservices from a corp/person (other than a listedcorporation) [for purposes of trade or commerce], engagein conduct that is, in all the circumstances,unconscionable.” (s51AC TPA)ASICA: supply of financial services

Unconscionability under TPA s51AB & AC& s12CB & CC ASIC Act – indicatorsParties’ relative bargaining strengthsWhether conditions extend beyond what is reasonably necessary to protectlegitimate interestsUnderstanding of the documentsAny undue influence, pressure, or unfair tactics by a party or someone acting ontheir behalfComparative prices and terms for availability of goods and services elsewhereSections 51AC & s12CC only: Consistent with treatment of similar parties/transactions Compliance with any relevant industry codes Unreasonable failure to disclose (i) intended conduct which might affect the otherparty’s interests and (ii) risks to the other party arising from that conduct whichreasonably they might not foresee Willingness to negotiate terms and conditions Whether parties act in good faith Whether contractual right exists to vary unilaterally a term or condition of acontract

Meanings & Levels of Unconscionability RegulationUnder ‘the Unwritten Law’ (4 categories as described by Paul Finn): [1] Unconscionability as the underlying concept for Equity as a whole [2] Unconscionability as an element or finding that is essential forspecific equitable/other actions (eg estoppel, relief against forfeiture,unconscionable dealings, unilateral mistake etc)- Coercion/exploitation/advantage-taking- Unconscionable exercise of rights, retention of benefits etc [3] Doctrines & remedies associated with unconscionable dealings &exploitation, advantage-taking, and defective understanding:– ‘spousal guarantees’ rules (eg Yerkey v Jones, Garcia)– ‘special disadvantage’ rule (eg Amadio)– Others (eg Bridgewater v Leahy) [4] Unconscionability as a direct ground of relief in its own right,unmediated by conventional doctrines (eg Lenah Game Meats v ABC)13

Full Fed Ct in ACCC v Samton Holdings (2002) Unconscientious exploitation of a party’s special disadvantage(eg Amadio) Defective understanding, relationship of influence, and absenceof independent explanation (eg Garcia) Unconscionable departure from previous representation (egestoppel – Verwayen, Waltons Stores v Maher) Relief against forfeiture and penalty (eg Legione v Hateley andStern v McArthur) Rescind contracts for unilateral mistake (eg Taylor v Johnson)14

Important High Court Instruction Affecting Statutory andNon-Statutory Interpretation Farah Constructions v Say-Dee [2007] HCA 22 at [135]:‘Intermediate appellate courts and trial judges in Australia shouldnot depart from decisions in intermediate appellate courts inanother jurisdiction on the interpretation of Commonwealthlegislation or uniform national legislation unless they are convincedthat the interpretation is plainly wrong. Since there is a commonlaw of Australia rather than of each Australian jurisdiction, thesame principle applies in relation to non-statutory law.’15

ACCC v CG Berbatis Holdings Pty Ltd [2000] FCA 1376 The [tenants] suffered what might be called a ‘situational’ asdistinct from a ‘constitutional’ disadvantage. That is to say itdid not stem from any inherent infirmity or weakness ordeficiency. It arose out of the intersection of the legal andcommercial circumstances in which they found themselves.That disadvantage, not being constitutional in character, wasnot able to be mitigated by the fact of legal representationwhich they had available to them at all material times.

Unconscionable Conduct Senate Economics Committee outcomes Government’s response Implications of TPA reforms for ASIC Act andcognate state laws on statutory unconscionableconduct Pros and cons of legislated examples Different kinds of principles Pros and cons of different kinds of principles17

Recommendation on Examples ‘In many circumstances, statutory unconscionable conduct canbe difficult for stakeholders to understand and for the courtsto apply, which contributes to a lack of certainty andconfidence surrounding the effect of the provisions.’ ‘A list of examples will not improve understanding orimplementation of the provisions.’ Scope for the ACCC, ASIC, and state regulators under a singlenational law on statutory unconscionable conduct (ie ACL) toinclude examples and other guidance.18

Recommendation on Principles ‘Interpretative principles, as an aid to interpretation of theprovisions, would assist the courts in interpreting theprovisions, stakeholders in understanding them, andregulators in enforcing them.’ ‘The principles should recognise that section 51AC (and,arguably, section 51AB) of the TPA and equivalent provisionsof the ASIC Act are intended to go beyond the scope of theequitable and common law doctrines of unconscionability, andare not confined by them.’19

Recommendation of Principles of Interpretation Sections 51AB and 51AC go beyond common law and equityAND not limited by them Apply to terms and progress of a contract – ie not just whathappens at execution Apply to systems/patterns of business behaviour – ie not justparticular incidents Amadio-like special disadvantage not needed to access thestatutory provisions/remedies20

Other Unconscionability-Related Reforms Harmonisation of sections 51AB and 51Ac to be considered byGovernment Given single national ACL + increased regulatory enforcementpowers, need for uniform national regulatory guidance by ACCC,ASIC, and state regulators on statutory unconscionable conduct(similar to proposals under unfair contracts regime) Nature of the regulatory guidance on unconscionable conduct Regulators to bring more test cases on the interpretative principlesand other reforms Non-government test case support/encouragement too (see lateradvocacy, pro bono, and research recommendations)21

Five Identified Franchising Behaviours Unilateral variation (eg via operations manual) Unforeseen capital expenditure End-of-term changes/arrangements Attribution of legal costs Confidentiality agreements22

Getting the Right Balance Availability of evidence/expertise Availability of sample clauses Connection between identified behaviours Spectrum of cost recovery circumstances Spectrum of regulatory options: Absolute ban Contingent ban Compensation/consultation right Structure for opening/closing relationships Benefits/limits of enhanced disclosure23

Other Franchising Matters Additional ‘Plain English’ up front disclosure document Treatment of ‘Good Faith’ ACCC’s function as regulator v mediator Need for Cth/State governmental attention to wider issue ofmechanisms for early dispute resolution intervention Attribution of legal costs to be examined more extensivelywithin that review process Government and ACCC to work with franchising sector todevelop better education, training, and research onfranchising24

Research, Advocacy, and Pro Bono Work Pro bono legal work to support further research, advocacy,and test cases for small business on both statutoryunconscionability and franchising Alignment with existing government policies and processes onpro bono work by lawyers and consumer research andadvocacy Evidence-based research needed to inform next review ofthese reforms and all other recent TPA/FCC changes Allow period of 3-5 years for current changes (including thosearising from the Panel’s Report to take effect25

Some Lessons for Lawyers in All Arms of the ProfessionSolutions to most major regulatory problems require more than doctrinal legal skills andknowledgeSignificance of representative bodies as stakeholders in legal regulatory reform process andassistance to themRealities and sophistication of the policy and reform development processImportance of legal submissions to public inquiries:Influencing the ‘rules of the game’ for big/small businessPractical legal expertise beyond governmental expertiseInsights into problems/traps beyond governmental expertiseMeaningful examples of clauses/practices/safeguardsConnections to CSR, pro bono, government procurement, business regulation impact,and other ‘business case’ issues for lawyers as client services providersNon-submission and post-submission complacency trapsNon-submission avenues of influenceSignificance of legal/public commentary/analysisInsights on the internal governmental processes for major reformsGap between research needs of one arm of government and what other arms of governmentrecognise in research funding/rankings26

Future Regulatory Guidance, Advice, and ‘Test Case’ LitigationFlow-through impact of everything in the context of a changed regulatory landscape:Pre-report governmental decisions to reform statutory unconscionable conduct and FCCOne single national law on statutory unconscionable conductEnhanced regulatory powers (eg infringement notices)Recent ACCC/ASIC court wins and renewed impetus for test cases Ongoing test cases on scope of statutory unconscionability in other contexts (eg share margin calls –Goodridge case)Framing regulatory guidance beyond decided casesPotential harmonisation and impact of business/consumer provisions on unconscionable conductFurther judicial rationalisation of unconscionability doctrines (flagged by French J in Berbatis)Academic/judicial development of framework for statutory unconscionable conduct transcending existingnon-statutory bases for reliefUnresolved legal questions for ‘test case’ advice/litigation about:Spread of unconscionability doctrines across ss51AA-51ACStatutory extensions beyond those doctrinesApplication of ‘special disadvantage’ to B2B contexts (eg Bell Group v Westpac and Optus v Telstralitigation)Existence, scope, and application of ‘situational’ forms of special disadvantageMeaning, scope, and application of good faith as an indicator of statutory unconscionabilityInteraction with ongoing academic/judicial disputes about the content and tests for good faith undercontract law27