Unconscionable Conduct

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Unconscionable conduct is unfair or unreasonable conduct in business transactions that goes against good conscience. This can occur in transactions between businesses or in transactions between businesses and consumers.

Unconscionable conduct within the meaning of the unwritten law of the States and Territories (1) A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.

Laws Governing Unconscionable Conduct The Meaning of Unconscionable Conduct

Section 51AC of the Trade Practices Act 1974 prohibits unconscionable conduct in certain business transactions and is of fundamental significance to the Australian franchising sector. The extent of the prohibition, which was introduced in 1998, is currently uncertain. However, the Australian Competition and Consumer Commission (ACCC), which oversees the operation of the act, has had franchisors firmly within its sight since the provision's introduction. Franchisors must be extremely wary of Section 51AC in their dealing with franchisees (and other businesses), and should ensure that they have appropriate compliance strategies in place in their organization.

Laws Governing Unconscionable Conduct

The Trade Practices Act 1974 (Cth) is federal legislation that regulates the conduct of business in Australia. Among other things, the act prohibits businesses from engaging in 'unconscionable conduct' generally (Section 51AA), or in connection with the supply or possible supply of goods or services to consumers (Section 51AB) or small businesses (Section 51AC). The act is vigorously enforced by the ACCC.

Section 51AA enshrined the equitable doctrine of unconscionable conduct in the Trade Practices Act by prohibiting unconscionable conduct within the meaning of the unwritten law of the states and territories. However, in order to obtain relief under the equitable doctrine, a party must establish that it is under a special disability that the other party knew or ought to have known about and that the stronger party's conduct was inconsistent with good conscience under the circumstances. The courts had taken a limited view of what constituted unconscionable conduct, limiting its application to cases of special disadvantage such as legal incapacity, lack of command of the English language and similar extreme situations.

Section 51AC was introduced to remedy alleged deficiencies in Section51AA in addressing the problems encountered by small business, and does not require the complainant to be at a special disadvantage.

Section 51AC, the 'business unconscionability' provision, applies regardless of whether the small business is an acquirer (business consumer) or a supplier (small business supplier). Section 51AC does not apply to conduct in respect of the supply or acquisition of goods or services worth more than A$3 million. Listed public companies cannot claim relief under Section 51AC.

Although neither Section 51AA nor 51AC define 'unconscionable conduct', Section 51AC sets out a list of factors that the court may take into account in determining whether conduct in a particular case is unconscionable. These include:

the relative strengths of the parties' bargaining positions;

whether, as a result of conduct engaged in by the stronger party, the small business was required to comply with conditions that were not reasonably necessary for the protection of the stronger party's legitimate interests;

whether the small business was able to understand any documents relating to the supply or possible supply of goods or services;

whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the small business;

the amount for, and the circumstances under which, the small business consumer could have acquired identical or equivalent goods or services from a person other than the stronger party;

the extent to which the stronger party's conduct towards the business consumer was consistent with the stronger party's conduct in similar transactions between the stronger party and other like business consumers; and

the extent to which the stronger party was willing to negotiate the terms and conditions of any contract for supply of the goods or services with the small business. The Meaning of Unconscionable Conduct

There is considerable uncertainty about what constitutes unconscionable conduct. Only a limited number of cases have been decided under Section 51AC. One of the most important of these is ACCC v Simply No Knead (Franchising) Pty Ltd [2000] 104 FCR 253, which involved a franchise system.

In that case Justice Sundberg of the Federal Court was willing to accept a broad definition of 'unconscionable conduct'. Simply No Knead (Franchising) Pty Ltd supplied training and material for making bread and related products in the home. The company had a number of franchisees. The Federal Court found that Simply No Knead had engaged in unconscionable conduct in breach of Section 51AC in relation to its treatment of certain franchisees. Sundberg found that the franchisor's conduct disclosed "an overwhelming case of unreasonable, unfair, bullying and thuggish behaviour" against five franchisees. The franchisor's conduct included:

refusing to deliver franchised products to franchisees;

refusing to negotiate with franchisees and to discuss matters of concern with them;

deleting franchisees' telephone numbers from the Telephone Directory Assistance Service without their knowledge or consent;

producing and distributing advertising and promotional material for its products in the territories of the franchisees and in areas proximate to their territories; and

refusing to provide current disclosure documents to three franchisees in response to written requests. However, a recent decision of the Full Federal Court suggests that the scope of the unconscionable conduct provisions of the Trade Practices Act may be narrower than previously thought. In view of this uncertainty, franchisors must tread warily in commercial dealings.

Appropriate steps include:

taking great care in relation to termination of agreements;

ensuring that all parties receive independent legal advice; and

acting quickly to resolve disputes appropriately.

For further information on this topic please contact Stephen Giles at Deacons by telephone (+61 3 8686 6000) or by fax (+61 3 8686 6505) or by email (stephen.giles@deacons.com.au). The Deacons website can be accessed at www.deacons.com.au.


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