Unconscionability and Special Disadvantage

In a decision that has generated a great deal of attention, the High Court of Australia (in a 4-3 split decision) dismissed ASIC’s appeal from the Full Court of the Federal Court against Mr Kobelt, former owner of Nobby’s Mintabie General Store, on the basis it had not been established that Mr Kobelt’s conduct in relation to a “book up system” he was operating was unconscionable.

The difficulty of the decision is reflected by the split findings of the Court.

Litigation history

ASIC brought proceedings in the Federal Court of Australia against Mr Kobelt alleging contraventions of section 29 (1) of the of the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) and section 12CB of the Australian Securities and Investments Commission Act 2001 (ASIC Act) with respect to a “book up” system he had been operating out of his store in rural South Australia.

Mr Kobelt provided a book up system to his customers whom were mostly Aboriginal residents of the APY Lands in South Australia.  This system allowed people to purchase goods and second-hand motor vehicles in exchange for providing him with their debit cards, PIN, and details of their income, and as payment, Mr Kobelt would withdraw money from their accounts on or around the day they were paid.

The primary judge found:

• As Mr Kobelt did not hold a credit licence permitting him to engage in credit activity, he had contravened section 29 (1) of the NCCP Act by providing credit to purchasers of second-hand motor vehicles;¹ and
• Mr Kobelt’s conduct with the supply of credit under the book up system was unconscionable pursuant to section 12CB of the ASIC Act.²

Mr Kobelt appealed against this decision to the Full Court of the Federal Court of Australia, and the appeal was allowed in part only in relation to the findings of his contravention of section 12CB of the ASIC Act.   The Full Court was not persuaded that Mr Kobelt’s conduct in supplying credit on his book-up terms was unconscionable³ and set aside the primary judge’s orders arising from the finding of unconscionable conduct.⁴

ASIC was granted special leave by the High Court to appeal the orders made by the Full Court The appeal was brought on three grounds which challenged the weight which was given by the Full Court to the factors relating to whether the conduct in connection with supply of credit by Mr Kobelt was rightly characterised as unconscionable.⁵

ASIC’s central submission underlying each of its grounds of appeal was that:⁶

[T]he factors that made Mr Kobelt's customers vulnerable and that therefore led them to be willing voluntarily to enter into the book-up arrangement, contrary to their interests, were wrongly treated by the Full Court as excusing what would otherwise have been unconscionable conduct anywhere else in modern Australian society.

Decision

Section 12CB of the ASIC Act provides that a person must not, in trade or commerce, in connection with the supply or possible supply of financial services to a person or the acquisition or possible acquisition of financial services from a person, engage in conduct that is, in all the circumstances, unconscionable.

The principle of unconscionable conduct as noted by the High Court, requires not only that the innocent party to the transaction be subject to a special disadvantage, but that the other party must also unconscientiously take advantage of that special disadvantage.⁷ That is, it is a two part test: there must be not just a party with a special disadvantage but a counterparty who takes advantage of that special disadvantage.

It was determined that while Mr Kobelt's book-up credit system was open to abuse, Mr Kobelt did not abuse it.  In the circumstances, the Full Court was right to hold that Mr Kobelt's conduct in connection with the supply of credit to his Anangu customers was not unconscionable.⁸

Kiefel CJ, Bell J, Gaegler J and Keane J held that there was an “absence of unconscientious advantage obtained by Mr Kobelt from the supply of credit to his Anangu customers under his book-up system”⁹ and dismissed the appeal with costs.

In his decision, Keane J made note that the use of the word “unconscionable” in s12CB of the ASIC Act instead of an alternative term such as “unjust”, “unfair” or “unreasonable” reflects a deliberate legislative choice to proscribe a particular type of conduct,¹⁰ and thus, the ordinary meaning of unconscionable requires an element of exploitation.¹¹ Keane J found that ASIC’s case did not establish that Mr Kobelt exploited his customers' socio‑economic vulnerability in order to extract financial advantage from them.¹²

Nettle, Gordon  and Edelman JJ dissented. Nettle and Gordon JJ noted in their dissent that a party will have unconscientiously taken advantage of an innocent party when the former knew or ought to have known of the existence and effect of the special disadvantage,¹³ and that unconscionable conduct does not require a finding of dishonesty¹⁴ observing:¹⁵

The lack of suggestion of dishonesty on the part of Mr Kobelt does not prevent Mr Kobelt's book-up system being unconscionable.  Dishonesty is not required for a finding of unconscionable conduct in equity.

Further, Nettle and Gordon JJ held:

Unconscionable conduct can include the passive acceptance of a benefit in unconscionable circumstances.  And unconscionable conduct can be found even where the innocent party is a willing participant, the question is how that willingness or intention to participate was produced.¹⁶

That is, the minority would have imposed a different test to the majority.

Lavan comment

The doctrine of unconscionability is designed to “correct” consciences, it is intended to manage the use of private rights obtained from another person by preventing the abuse of power, victimisation and serious misconduct.  Since decisions like Commercial Bank of Australia v Amadio¹⁷ have been handed down, questions of responsible lending of credit and conscionable conduct have long been discussed together.  With new ways to obtain credit through interest free schemes and “buy now pay later” arrangements conscionability is sure to become a key topic for discussion. Where a party is dealing with another who is not in an equal position, care must be taken not to exploit the imbalance.