19 Aug 2013

A new approach to defining unconscionable conduct? ACCC wins Lux case on appeal

The ACCC's win on appeal against Lux Distributors clarifies how courts will apply the Australian Consumer Law's unconscionable conduct provisions, and is likely to bolster the ACCC's efforts to prove other cases of alleged unconscionable conduct in commercial or small business transactions (Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90).

Moral judgment not the issue in unconscionability under the Australian Consumer Law

The Lux case is important because in defining when conduct is "unconscionable" or "against conscience" the Full Court has applied a test of the norms and standards of today rather than moral judgment:

"That normative standard is permeated with accepted and acceptable community values. In some contexts, such values are contestable. Here, however, they can be seen to be honesty and fairness in the dealing with consumers. The content of those values is not solely governed by the legislature, but the legislature may illuminate, elaborate and develop those norms and values by the act of legislating, and thus standard setting. The existence of State legislation directed to elements of fairness is a fact to be taken into account. It assists the Court in appreciating some aspects of the publicly recognised content of fairness, without in any way constricting it. Values, norms and community expectations can develop and change over time. Customary morality develops “silently and unconsciously from one age to another”, shaping law and legal values: Cardozo, The Nature of the Judicial Process (Newhaven, Yale University Press, 1921) pp 104-105. These laws of the States and the operative provisions of the ACL reinforce the recognised societal values and expectations."

While the Full Court indicated that questions of morality may still be relevant to some notions of unconscionable conduct, the implication is that it may not be necessary to show that the conduct revealed a high degree of moral fault or culpability, as had been suggested in some earlier cases.

The Australian Consumer Law has no definition of unconscionable conduct and the concept of when conduct "shows no regard for conscience" is explicitly not to be limited by the "unwritten" or common law or equitable notions. Relevant conduct may include how a contract is performed, or how it is negotiated. The legislation allows a court to consider refusals to negotiate, retrospective changes in terms, or imposing unexpected costs on small business.

However to date the courts have rarely intervened in commercial dealings and normally the terms of parties' agreement will prevail.

But the courts have said that there will be cases where people have capriciously exercised or threatened to exercise their rights in a manner which may be regarded as unconscionable. One example was a case where a customer holding large bank guarantees (which had been granted for a specific purpose) threatened to call them up in completely unrelated circumstances in conjunction with seeking a 25% reduction in charges from the supplier (Olex Focas Pty Ltd v Skodaexport Co Ltd (1996) 70 ALJR 983).

The Australian Consumer Law allows the court to find unconscionable conduct in commercial dealings having regard to matters such as:

  • differences in bargaining positions between a supplier and customers;
  • imposing terms and conditions that are not reasonably necessary;
  • any unfair tactics used against the business;
  • whether the large business unreasonably failed to disclose to the other party risks which were apparent to the large business;
  • refusal or unwillingness to negotiate terms and conditions; and
  • unilateral rights to vary agreements.

Why the Full Federal Court found Lux's conduct was unconscionable

Lux sales representatives gained entry to consumers' homes on the pretext of a free maintenance check of their vacuum cleaners when the objective was to sell a new product.

The sales representatives were able to spend considerable time in selling the benefits of a new vacuum cleaner to three elderly consumers.

The Full Court found that the relative bargaining strengths between the Lux and consumers and the deception combined to show that the sales were a result of pressure tactics. On that basis the conduct was found to be unconscionable.

It also paid particular regard to two aspects of Lux's conduct:

  • the failure to comply with the door-to-door selling requirements; and
  • it was based on deception.

Lessons for business from the Lux case

The Full Court's finding that a high degree of moral fault or culpability is not required could be of particular relevance for small business transactions where questions of morality may well be difficult to apply but an objective "unfairness" test or "contrary to acceptable standards of commercial dealings" might widen the scope of the new laws.

As a result, businesses need to be vigilant that they can provide reasonable justifications for their system and approach used for negotiation. While the boundaries of unconscionable conduct in commercial dealings are still very difficult to draw it is clear both the ACCC and the courts are looking to develop the law. It is timely for businesses to be proactive in reviewing their systems and training of employees in this area.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.