No special disadvantage required for a finding of unconscionable conduct under section 21 of the ACL

By Alicia Hill, Principal and Lee Filkin, Law Clerk

The decision of ACCC v Quantum Housing Group [2021] FCAFC 40 broadened where unconscionable conduct under section 21 of the Australian Consumer Law (ACL), can be found to have occurred, by saying that the party being acted against does not have to demonstrate a special disadvantage to obtain relief from the conduct.

Background

Quantum Housing Group (QHG) was in the business of arranging investments in properties that qualified for incentives under the National Rental Affordability Scheme (NRAS).

From 2017, QHG engaged in a plan described as the “Roll Up Plan,” aiming to pressure all investors who had agreements with QHG to transfer management of their properties to property managers identified as approved by QHG. It was not disclosed to investors that QHG had a commercial relationship with these approved managers.

QHG’s Roll Up Plan involved a number of measures designed to exert undue pressure on investors who resisted transfers to approved managers. These measures included misleading correspondence encouraging investors to terminate relationships with their existing property managers, and unilateral imposition of Accreditation Guidelines, which required existing property managers to pay a $10,000 security deposit if the investor did not transfer their property to an approved manager.

Investors who continued to resist these transfers were ultimately issued with notices stating that they were in default under their agreement with QHG, which governed their entitlement to the NRAS incentive.

While QHG carried out its Roll Up Plan, management of 260 properties was transferred to a QHG approved manager.

At trial

Despite agreement between the parties that QHG was in a superior bargaining position by reason of the investors’ reliance on QHG to receive NRAS incentives, J held at trial that unconscionability was lacking from QHB’s conduct, due to an absence of vulnerability on the part of the investors.

His Honour referred to the majority decision in ASIC v Kobelt [2019] HCA 18, in which Kiefel CJ, Bell and Keane JJ held that unconscionable conduct requires a finding of victimisation, exploitation or a predatory state of mind by a party in a stronger position, such that falls well outside the bounds of morally acceptable commercial behaviour.

Colvin J reiterated that it is not enough that conduct be considered unfair or unreasonable. In order for unconscionable conduct to be made out, a further measure of vulnerability and exploitation is required, such that constitutes a special disadvantage.

On this basis, Colvin J held at trial that QHG’s conduct did not constitute unconscionable conduct, as the investors did not possess the requisite element of special disadvantage; that is, the investors were able to understand the financial dealing in which they were involved, and they suffered no financial detriment as a product of QHG’s conduct.

On appeal

The primary issues of relevance in the ACCC’s appeal were:

• whether the trial judge erred in finding that unconscionable conduct under section 21 of the ACL requires, in every case, exploitation by the stronger party of a special disadvantage (or “vulnerability”) on the part of the weaker party;
• whether the trial judge erred to the extent that he held that unconscionable conduct under s 21 of the ACL requires, in every case, exploitation of some vulnerability or disadvantage; and
• whether the trial judge erred in failing to find QHG’s conduct was unconscionable under s 21 of the ACL.

Kobelt principle confined to specific facts: special disadvantage not required

On appeal, Allsop CJ, Besanko and McKerracher JJ overturned the primary judge’s decision and found that QHG’s behaviour could be characterised as unconscionable conduct.

Their Honours considered the decision in Kobelt, where it was held that the conduct could not be characterised as unconscionable under s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth).

Their Honours held that this decision was limited to the particular facts of that case and was not a universal statement of principle.

Their Honours found that it was unnecessary for the investors to have a special disadvantage, being some form of pre-existing disability, vulnerability or disadvantage of which advantage was taken, in order for a finding of unconscionable conduct to be made out on the facts.

It was held that QHG had engaged in unconscionable conduct by implementing the measures that it had under section 21 of the ACL.

Implications for Franchisors

This case has broadened the types of cases to which section 21 of the ACL can apply and unconscionable conduct can be found to have occurred.

Franchisors should be aware that claims may be able to made under section 21 of the ACL by franchisees who do not possess any special vulnerability or disadvantage, however any such claim will still need to satisfy the other factors required to establish a contravention, such as the conduct that occurred having been unconscionable (as distinct from unfair or unlawful). 

If you have any questions regarding this decision or any matters raised by it, please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au