this product is unavailable for purchase using a firm account, please log in with a personal account to make this purchase.

Unconscionability and the Trade Practices Act

Feature Articles

Cite as: (2003) 77(8) LIJ, p.38

Taking advantage of a superior bargaining position in a commercial context does not necessarily satisfy the legal definition of “unconscionable conduct”.

By Dr Srechko Kontelj

In Australian Competition and Consumer Commission v Berbatis Holdings Pty Ltd,[1] the High Court held that a landlord who took advantage of its superior bargaining position in the context of a shopping centre lease renewal negotiation process did not act unconscionably within the legal meaning of this term as used by the Trade Practices Act 1974 (Cth) (TPA).

The case originally revolved around the renewal negotiations of a shopping centre lease. Berbatis Holdings was the owner of a shopping centre in Western Australia. One of the tenants, Mr and Mrs Roberts (the Roberts) who operated a fish shop in the centre, wished to sell their business. Their lease, however, was due to expire. As is usual in the sale of a business, its value was tied to the length of its lease. While the landlord was under no obligation to agree to a new lease, it was prepared to do so on the condition that the Roberts discharged the landlord from all claims arising from any act or omission by the landlord before the proposed assignment date and, further, that the Roberts consented to the dismissal of any current proceedings they had against the landlord.

At the time of the negotiations the Roberts were part of a legal action brought by a group of centre tenants seeking a refund of alleged overpayments of management fees and variable outgoings. The Roberts estimated that the value of their legal claim was about $50,000. The offer to purchase their business was $65,000.

The Roberts were in a difficult bargaining position. They had no legal right to demand an option to renew their lease yet the sale of their business was conditional on them obtaining a new lease for the prospective purchaser. The Roberts’ prospects of making an advantageous sale depended on the cooperation of the landlord, which it was not obliged to give. The Roberts felt they had no alternative but to agree to the landlord’s request to impose a condition in the new lease abandoning their right to pursue the land lord for the alleged overpayments. This is what they did.

The Australian Competition and Consumer Commission brought an action against the landlord alleging that its conduct was unconscionable, despite the fact that the tenants never sought to have the deed they entered into with the landlord set aside. The tenants did not want the deed set aside because it underpinned their sale agreement. The tenants were well aware that if the landlord had not agreed to a renewal and assignment of the lease the tenants would not have anything of value to sell.

The issue

The specific issue was whether the lessors had engaged in conduct that was “unconscionable within the meaning of the unwritten law” in stipulating as a condition of their con sent to a proposed renewal or extension of a lease, in contemplation of its assignment, a requirement that the lessees abandon certain claims against them. The Federal Court in the first instance held that the landlord’s actions were unconscionable. The Full Federal Court’s reversal of the initial decision was upheld by a 3-1 majority of the High Court.

The tenant’s case
The appellant tenants argued that the unconscionable conduct in question was “the knowing exploitation by one party of the special disadvantage of another”, the special disadvantage being a disabling circumstance seriously affecting the ability of the innocent party from making a judgment in its own best interest.

Gleeson CJ held that this approach was consistent with “the unwritten law concerning unconscionable conduct”[2] and also consistent with the second reading speech in federal Parliament when the legislation was introduced, when it was espoused that:

“Unconscionability is a well understood equitable doctrine, the meaning of which has been discussed by the High Court in recent times. It involves a party who suffers from some special disability or is placed in some special situation of disadvantage and an ‘unconscionable’ taking advantage of that disability or disadvantage by another. The doctrine does not apply simply because one party has made a poor bargain. In the vast majority of commercial transactions neither party would be likely to be in a position of special disability or special disadvantage, and no question of unconscionable conduct would arise. Nevertheless, unconscionable conduct can occur in commercial transactions and there is no reason why the Trade Practices Act should not recognise this”.[3]

Gleeson CJ, citing Fullagar J in Blomley v Ryan,[4] observed that the common characteristics of those circumstances of disability or disadvantage which place one party at a serious disadvantage in dealing with another include “poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary”.[5]

In finding for the tenants in the first instance, French J found that the tenants suffered from a “situational” disadvantage which although not stemming from any inherent infirmity or weakness or deficiency was nevertheless a special disadvantage for the purpose of assessing unconscionable conduct.

Gleeson CJ held on this point that “a person is not in a position of relevant disadvantage, constitutional, situational, or otherwise, simply because of inequality of bargaining power. Many, perhaps even most, contracts are made between parties of unequal bargaining power and good conscience does not require parties to contractual negotiations to forfeit their disadvantages, or neglect their own interests”.[6]

Special disadvantage, it was held by Gleeson CJ, does not arise whenever there is some difference in the bargaining power between the parties; rather it arises when one of the parties due to their disadvantage suffers from an inability to judge their own best interests.[7]

As was held by Kitto J in Blomley v Ryan,[8] the adjective “special” in the context of legal unconscionable conduct “applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands”.

Taking advantage of a superior bargaining position in a commercial context will not on its own satisfy the legal definition of unconscionable conduct under s51 of the TPA.

In the circumstance of Berbatis, the High Court held that there was neither a special disadvantage on the part of the tenants, nor unconscionable conduct on the part of the landlord.[9]

As Gleeson CJ pointed out, all the parties in this matter were business people who were seeking to advance their own particular financial interests. His Honour held that “the critical disadvantage from which the lessees suffered was that they had no entitlement to a renewal or extension of their lease; and they depended on the lessor’s willingness to grant such an extension or renewal for their capacity to sell the goodwill of their business for a substantial sum ... (they) were at a distinct disadvantage, but there was nothing ‘special’ about it ... they suffered from no lack of ability to judge or protect their financial interests ... there was a lack of ability to get their own way. That is a disability that affects people in many circumstances in commerce, and in life. It is not one against which the law ordinarily provides relief”.[10]

Implications

The decision can be seen as a victory for landlords who can with some degree of confidence robustly negotiate with tenants from a point of commercial strength to their best advantage. It was hoped by small business operators, especially shopping centre tenants, that the courts might use s51AA of the TPA to give legal protection to their relatively weak bargaining positions. In the immediate aftermath of the decision small business seized on the case as proof that the TPA, as presently drafted, does not protect small business from big business.[11] However, this feeling of doom and gloom on the part of small business may not be warranted.

The case was decided on the relatively narrow s51AA, whereas since the decision s51AC, which is specifically directed to protect small business, has been introduced. However, as yet s51AC is untested.

Section 51AC makes it an offence to engage in conduct in the context of trade or commerce with a business consumer who is not a listed company, which in the circumstances is unconscionable. The added protection for small business comes from sub-ss51AC(3) and (4) which set out the matters that a court may have regard to when considering unconscionability under s51AC(1), namely:

  • the relative bargaining strength of each party;
  • whether the business consumer was required to com ply with conditions not reasonably necessary for the protection of the company’s legitimate interests;
  • whether the business consumer was able to understand any documents relating to the supply or possible supply of the goods or services;
  • whether the company exerted any undue influence or pressure on, or used any unfair tactics against, the business consumer or a person acting on behalf of the business consumer;
  • the amount for which, and the circumstances under which, identical or equivalent goods or services could have been acquired from or supplied by another company;
  • the extent to which the company discriminated against the particular business consumer when compared to the company’s treatment of other like business consumers in similar transactions;
  • the requirements of any applicable industry code;
  • the requirements of any other industry code, if the business consumer acted on the reasonable belief that the company would comply with that code;
  • the extent to which a company unreasonably failed to disclose to the business consumer:
    (i)  any intended conduct that may affect the interests of the business consumer; and
    (ii)  any risks arising from the company’s intended conduct;
  • the extent to which the company was willing to negotiate with the business consumer; and
  • the extent to which all parties acted in good faith.

The Berbatis decision will not be the last word on unconscionable conduct in the area of commercial landlord and tenant lease negotiations. Section 51AC is broader than s51AA and, when read with the provisions of sub-ss51AC(3) and (4), imposes a requirement on the landlord to act in good faith and reasonably in its negotiations with commercial tenants and not to impose conditions that are not reasonably necessary for the protection of its legitimate interests. This is a significant departure from the way in which the High Court addressed the issue of relevance in Berbatis where Gleeson CJ held that “what is relevant to a commercial negotiation is whatever one party to the negotiation chooses to make relevant”.[12]

Further, it is important to remember that s51AC is also mirrored in Victoria’s new retail tenancy legislation, there fore one can expect to see the claim of unconscionability being made more frequently by commercial tenants against landlords, especially in the lopsided bargaining environment of shopping centre lease negotiations.


DR SRECHKO KONTELJ is a general counsel specialising in business law. He previously lectured in tax law at Deakin University and in 1999 was awarded that university’s first doctorate in juridical science. Dr Kontelj is also a specialist reserve legal officer with the RAAF.


[1] (2003) HCA 18 (9 April 2003).

[2] Note 1 above, at para 5.

[3] Australia, Parliamentary Debates, House of Representatives, 3 November 1992, 2408.

[4] (1956) 99 CLR 362 at 405.

[5] Note 1 above, at para 8.

[6] Note 1 above, at para 11.

[7] Note 1 above, at para 12.

[8] Note 4 above, at 415.

[9] Note 1 above, per Gleeson CJ at para 15.

[10] Note 9 above.

[11] See article by Toni O’Loughlin, “Call for tougher laws to protect small businesses” Australian Financial Review, 11 April 2003.

[12] Note 1 above, at para 16.

Comments




Leave message



 
 Security code
 
LIV Social
Footer