The ever expanding consumer population has found ways of redress according to legislation and general law in Australia. This was necessitated as a result of being disadvantaged by unfair and discriminatory practices by large conglomerates. This paper deals with the changes in the common law and statutory developments in trade practices based on the outcome of the dispute between Commercial Bank of Australia Ltd and Amadio (Case no: 151 CLR 447; 1983). This paper will also review the introduction of ï¿½unconscionabilityï¿½ in the Trade Practices Act and how it forms a substantiative part of the contract between the involved parties. The Amadio was the first case in which unconscionable conduct was used and thus, became the driving force behind the amendment of unconscionability in the Australian law of contract. There has been a rise in consumer protection laws which look to provide justice to consumers, enforcing the "unconscionable conduct" clause to contractual relations. The ownership of the business transaction rests largely on the trader thereby ensuring that the transaction is reasonable and fair.
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Unconscionable conduct as a principle was initially designed to uphold equity and fair play. It defines unconscionable behaviour as that which attracts censure and justifies the courts in granting relief to those who suffer by it. In Australia, the doctrine was put into practice by the High Court in the Blomley v Ryan case and its validity was further strengthened in the Commercial Bank of Australia Ltd v Amadio case of 1983.
Facts of the case:
An elderly Italian migrant couple, Mr. and Mrs. Amadio stood as guarantors against their sonï¿½s loan for his construction business from the Commercial Bank of Australia. The bank manager, Mr. Virgo, who was in close communication with the son, Vincenzo Amadio, had better understanding of the business reality and knew that the son had probably misrepresented facts in a bid to get his parents to stand as guarantors. Subsequently, when Vincenzo Amadioï¿½s business failed, the bank was required to enforce the guarantee by mortgaging the building owned by Amadios.
The issue in the court was whether the Amadios were bound by the contract of guarantee taking into account the circumstances in which they signed it:
i. Amadios had little understanding of the English language
ii. They did not seek professional and independent advice with respect to the contract. The bank manager, Mr. Virgo, having some knowledge of Vincenzo Amadioï¿½s business situation, did not suggest the Amadios to seek independent advice.
iii. At the time the mortgage was being executed, the bank had some idea of the sonï¿½s unstable financial situation and was aware that the Amadios were probably ignorant of that fact.
iv. The Amadios had assumed the liability to be limited to $50,000; however, the bank did not inform the Amadios that there was no limit on their liability as guarantors.
In the decision his honour Justice Manson held that the bank manager knew about the special disability (Keogh, 1999, p.3) of Amadios and yet did not step forward to ensure that they understood the nature of the transaction. Therefore the bankï¿½s taking advantage of the opportunity which presented itself was unconscientious. This is the underlying basis on which the unconscionability clause rests.
Outcome of the Court's decision:
A new concept has been added by general and contractual law and has been passed by Australian legislation based on the Amadio case 1983. The term unconscionability can be distinguished in two ways.
ï¿½ Procedural unconscionability which refers to the disadvantage suffered by a weaker party in negotiations.
The stronger party is taking advantage of the fact that the consumer either lacks enough knowledge or understanding of the contract or is incapable of making an independent decision. The trader does not point out that the consumer has avenues in getting help in clearly understanding the contract. So in this case, the trader is taking advantage of the consumer's lack of understanding for his own benefit.
ï¿½ Substantive unconscionability which refers to the unfairness of terms or outcomes.
This could also point towards the use of undue influence/ coercion (Goldring, 1990, p 34) In this example, the consumer is not in a position to make an independent decision based on the fact that undue influence is made to bear upon him/her.
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Most often the former will lead to the latter but not necessarily so. The existence of the former without the latter may be sufficient. The latter without the former may not be sufficient. As with the issue of consideration, it is not for the court to determine whether someone has a good or bad bargain, merely whether they had the opportunity to properly judge what was best in their own interests. Because unconscionability invariably results from an imbalance in bargaining power, individuals and small companies may well be able to establish that they were subject to unconscionability; large corporations are not so easily accommodated.
The duty imposed on the stronger party is the duty to act reasonably, that is to say that assistance or explanation need only be provided where the stronger party is either aware of the other partyï¿½s disadvantage or ought to be sentient of their issues. In the Amadio case the verdict suggests that if the stronger party can prove in the court that the contract was fair, just and reasonable (Gillies, 2004, p 229) then the transaction may not be impugned.
Various developments in common law and statutory practices have emerged since the decision under Commercial Bank of Australia v Amadio case. This includes the Trade Practices Act 1974, Australian Securities and Investments Commission Act 2001, the Corporations Act 2001 and various industry codes of conduct. In addition to the above laws there is a special Contracts Review Act 1980, which attempts to deal with unfair and unconscionable contracts.
Trade Practices Act
In 1992, a new Part IVA called Un-conscionable Conduct was incorporated in the Trade Practices Act, 1974. This new part contains a new section 51AA which expressly refers to and applies the common law principle of unconscionable conduct to transactions between businesses as distinct from consumer transactions. A companion section, s 51AB, is a restatement of the previous section 52A, that has now been repealed, which prohibits unconscionable conduct in ordinary consumer transactions. The Trade Practices Commission issued a direct to s 51AA or Unconscionable Conduct in Commercial Dealings in October 1993.
Part IVA of the Trade Practices Act includes three separate subsections viz. 51AA, 51AB and 51AC to deal with 'unconscionable conduct'. Although, section 51AA deals only with 'procedural unconscionability' that encompasses the formation of a contract, the remaining two sub-sections 51AB and 51AC deal with 'substantive unconscionabilityï¿½ which refers to the actual functioning of a contract.
This section of the Trade Practices Act prohibits a corporation from engaging in conduct that may be represented as unconscionable in its trade and commercial dealings under the single common law of the States and Territories. The common unwritten law refers to the legislation created by the courts of common law and equity. The term unconscionability in section 51AA was brought about as a change from the traditional unconscionability doctrine referring to special disadvantage and unconscionable bargains. Special disadvantage serves to protect individuals who, in seeking to make judgments in their best interests, are disabled by age, infirmity, mental illness or other characteristics. A contract that is formulated under this duress is known as a breach of procedural unconscionability (Gillies, 2004: 299). This section of the Trade Practices Act takes into account the conditions under which a contract is signed.
In dealing with Amadio case of 1983, Justice Mason expounded that an ordinary disparity in the bargaining powers of the two parties involved in a transaction will not qualify for special disability. For one of the parties to be considered for special disability there has to be sufficient reason to believe that the ability in making a correct judgement in oneï¿½s own interest is impacted severely for that party. The verdict in the Amadio case also made it known that it was the setting in which a contract was drawn up that was relevant in establishing if the contract was unconscionable. If the terms of the contract are harsh, it cannot be the sole reason for the contract to be impeached under the criterion of unconscionability. The condition under which the contract is drawn up is just as required to establish unconscionable conduct within the contractual agreement.
This section proscribes unconscionability in consumer transactions, and also points out various factors that indicate unconscionability. This is significant in clarifying whether a consumer is at a special disability and if the concept of unconscionability is applicable in the given circumstances. Subsection 51AB was the original stipulation on unconscionable conduct in the Trade Practices Act. It had been introduced in section 52 of the TPA in 1986 which was later amended and included as section 51AB in 1992.
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Subsection 51AB (1) states that a business or company must not engage in any conduct that is in all circumstances, unconscionable; be it in trade, commerce, or in connection with supply of goods or services to a person.
Subsection 51AB (2) refers to the matters in which a court may consider a corporation to have breached a contract and may use the information given to determine the extent of the contravention of subsection (1). The parameters include:
ï¿½ the relative bargaining powers of the trader and the consumer;
ï¿½ whether the weaker party or consumer was asked to meet the terms of the corporation in compliance with reasonable and necessary protection of the genuine interests of the corporation;
ï¿½ whether the consumer had been able to understand clearly the terms of the documents related to the supply of goods and services;
ï¿½ whether any undue influence or pressure tactics were used to coerce the weaker party to submit to unfair terms of the contract in relation to goods or services;
ï¿½ the requisite amount needed to acquire identical or equivalent goods or services from another trader than the one in question.
In order to settle the concerns that existing statutory and common law causes of action did not adequately protect small businesses against unfair or exploitative conduct, this section was added to the TPA in 1998 .It propounds the ï¿½conduct that is, in all the circumstances, unconscionableï¿½ in connection with dealings with small businesses. Section 51AC attempts to free small commercial transactions from morally reprehensible conduct and also it forms part of a modern trend in the law towards legal evaluation of the normative conduct of commercial dealings.
Similar to section 51AB, this section also points out a number of factors that the courts may consider in determining whether the conduct of the 'supplier' (51AC(3)) or the 'acquirer' (51AC(4)) is unconscionable (without in any way limiting the matters to which the Court may have regard). These include, in addition to the the five factors listed in section 51AB( (above) , the following factors:
??the consistency of the conduct with similar transactions;
?? whether any applicable industry code is required;
??whether there is any non-disclosure of conduct in order to affect the person's interest;
??the degree of negotiation of a contract;
? the validity of contractual right of supplier / acquirer to vary unilaterally a term or condition of a contract; and
??to what extent the parties acted in good faith.
Unconscionable conduct in financial services
Financial services reforms introduced a new regime on 1 July 1998 for the financial services sector. Under these changes, the Australian Securities and Investments Commission (ASIC) assumed primary responsibility for consumer and small business protection issues in this sector.
Though TPA act includes provisions dealing with unconscionability within the meaning of the unwritten law, consumer-type unconscionability and small business unconscionability.
The respective application of those three types of unconscionable conduct provisions to contracts of financial services is determined by considering particular exclusions and definitions under the ASIC Act section 12CA, CB and CC.
Although Financial services and products are defined in the Australian Securities and
Investments Commission Act 2001, the unconscionable conduct provisions under the ASIC Act mirror those of the Trade Practices Act, and therefore businesses have equivalent compliance obligations when dealing in financial services.
The provisions of section 51 AB (TPA act) are mirrored in section 12CA of the ASIC Act which states:
Unconscionable conduct within the meaning of the unwritten law of the States and Territories
(1) A person must not, in trade or commerce, engage in conduct in relation to financial services if the conduct is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.
(2) This section does not apply to conduct that is prohibited by section 12CB.
Similarly section 12CB mirrors the provisions under Section 51AB(TPA) ,which prohibits unconscionable conduct directed towards consumers in relation to financial services and section 12 CC mirrors the provisions under section 51AC(TPA) ,which prohibits unconscionable conduct in business transactions in respect of financial services.
Unconscionable conduct is also prohibited under a number of industry-specific legislative schemes. For example, legislation governing retail tenancy ï¿½ an industry the panel has been asked to consider in its review ï¿½ in each jurisdiction prohibits unconscionable or similarly unfair conduct by parties to a retail lease. Similar provisions can be found in legislation governing tourism services, fitness services, and residential property. Many of these provisions echo the terms of section 51AC of the TPA, and the statutory factors that are provided as being relevant to a finding of unconscionable conduct.
Fair Trading Acts
All states and territories have incorporated some form of prohibition on unconscionable conduct in their fair trading laws . The provisions under The State and Territory Fair Trading legislation mirrors the terms of section 51AB(TPA) . The basic proposition of the Act is that the businesses should be aware that the statutory protection against unconscionable conduct in consumer transactions is available in a range of venues in addition to the Federal Court. Though the legislation applies to "persons" rather than corporations, the section 43 of Act relates to unconscionable conduct by suppliers to CONSUMERS, therefore is inapplicable to farmers as business people; but it remains applicable to farmers as ordinary consumers (i.e., people buying goods for household or domestic purposes).
Contracts Review Act 1980
The Contracts Review Act is a special act which is passed by New South Wales to deal with unfair and unconscionable contracts. The terms of this act are in some ways similar to s 51AB of the Trade Practices Act and are also supposed not to be available in respect of ordinary business transactions. The courts have nevertheless taken a very generous view of what constitutes a non-business transaction and have provided relief in circumstances like in Amadio and Warburton under the Contracts Review Act, that is, the courts have allowed relief in respect of transactions with a distinctly business element to them. The act provides very flexible remedies.
The Act stresses on "unjust contracts" which are defined by reference to a list of criteria. The Act does not just focus on unconscionable bargaining tactics or inequality or pressure. It is also incorporates issues like substantive unfairness such as harsh terms or an unfair exchange.
In addition to above statutory laws, the unconscionable conduct provisions are part of the Australian Consumer Law (ACL), which is contained in a schedule to the Competition and Consumer Act 2010. Section 22 of ACL prohibits unconscionable conduct in small business transactions. It states that small businesses need to know what to do if they have been the target of unconscionable conduct, and how to prevent it from happening.
The business subjected to the conduct must not be publicly listed (a publicly listed company has its shares listed on the stock market).
Where either of these conditions is not met, s. 22 will not apply. However, the business may have other remedies available under section 20 (general unconscionable conduct), or other areas of common or equity law.
Under TPA Sections 51AA, 5lAB and 51AC do not affect an individualï¿½s right to seek redress under the unwritten law.
Parties who choose to take private action under the Trade Practices Act may seek redress in the form of an injunction (s. 80) and/or certain other orders (s. 87). These other orders, which a person must seek within six years of the cause of action relating to the conduct arising may include:
ï¿½ compensating a person for loss or damage
ï¿½ declaring a contract void in whole or in part
ï¿½ altering a contract or arrangement
ï¿½ requiring a refund of money or return of property
ï¿½ requiring that specified services be performed.
Damages (section 82) may be awarded if a person suffers loss or damage by the actions of another in breach of Part IVA. Damages may also be recovered against a person involved in a contravention. An action for damages must start within six years of the cause of action relating to the conduct arising. Pecuniary penalties (i.e. fines) are not available for breaches of Part IVA.
Remedies available to the Australian competition and consumer commission :
The ACCC itself may take either administrative or court action against a business or individual that has engaged in unconscionable conduct in contravention of ss. 51AA, 51AB or 51AC. The action taken will depend on both the ACCCï¿½s priorities and the nature of the particular conduct. Administrative action may take several forms. For example, in the first instance, the ACCC may request that someone stop certain conduct or change particular trading practices. In more serious instances it might accept an enforceable
undertaking from the company concerned and make these public. The court can enforce written undertakings upon application by the ACCC (section 87B). If a matter cannot be resolved administratively, the ACCC may take court action. The ACCC can seek injunctions (section 80) or other orders (section 87). It may also take representative action on behalf of people who have suffered, or are likely to suffer, loss or damage as a result iof conduct by a person in contravention of Part IVA(section 87(1A)(b)).
The ACCC can also seek a community service order (section 86 C(2)(a)), probation orders (s. 86 C(2)(b)), orders for disclosure of certain information (section 86C(2)(c)) and corrective advertising (s. 86C(2)(d)). Except for injunctions, applications seeking orders from the court must be made within six years of the cause of action that relates to the conduct arising
In conclusion it can be said that the legal doctrine of unconscionable conduct, in its application, sweeps aside a basic principle of contract law (i.e. that parties who sign a contract are bound by the terms of the agreement). There are now both statutory and non-statutory checks designed to provide to aggrieved party(person or corporate entity) with remedies against unconscionable conduct in their dealings with other parties( person or entity).
Indeed, the case of Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 is significant in terms of setting a precedent in trade practices.