Australia: ACCC wins Lux unconscionable conduct appeal

Last Updated: 23 August 2013
Article by Alistair Newton

In a significant decision with implications for all businesses, the Full Federal Court has allowed an appeal by the Australian Competition and Consumer Commission (ACCC) in its case against Lux Distributors Pty Ltd (Lux), a seller of vacuum cleaners. In doing so, the Full Court has provided a measure of clarity on the prohibition against unconscionable conduct in the Australian Consumer Law (ACL).

The approach taken by the Full Federal Court may well have implications not only for business-to-consumer agreements, but also to business-to-business arrangements.

UNCONSCIONABLE CONDUCT UNDER THE ACL AND THE ACCC'S ALLEGATIONS

Section 21 of the ACL provides that a person must not, in trade or commerce, in connection with the supply of goods or services to another person, engage in conduct that is, in all the circumstances, unconscionable.

In principle, a person can engage in unconscionable conduct by entering into an agreement (such as by taking advantage of a customer's vulnerability to make a sale) or by their behaviour in the context of a pre-existing agreement or arrangement (such as by insisting on additional benefits not provided for by a relevant written contract).

However, the precise meaning of the word 'unconscionable' in this context is subject to perennial debate. The courts have held, in a somewhat circular fashion, that it involves things "not done in good conscience". It has also generally been understood that for conduct to be unconscionable it must be more than simply unfair or unreasonable and must involve a level of "moral tainting".

Briefly, Lux was alleged by the ACCC to have engaged in unconscionable conduct in relation to three elderly women in that:

  • Lux called each customer and offered to conduct "free maintenance checks" of their existing vacuum cleaners (which the ACCC alleged was a deceptive ruse to gain entry to each customer's home);
  • a Lux representative attended at the home of each customer and conducted a cursory check of their existing vacuum cleaner in circumstances where the check was designed always to result in the Lux vacuum cleaner outperforming it; and
  • each customer was then subjected to a range of pressure selling techniques over a period of between 1.5 and 2 hours, ultimately resulting in a sale.

It was also relevant that the Lux representatives failed to comply with various State and Commonwealth consumer protection measures, including, in one case, a requirement under the Fair Trading Act 1999 (Vic) not to remain on the premises for more than an hour with written consent and, in another case, a requirement in the ACL to make it clear at the outset that the true purpose of the visit was to sell goods.

THE TRIAL JUDGE'S DECISION

At trial, Justice Jessop held that Lux had not engaged in unconscionable conduct. In His Honour's view, Lux's conduct was in fact "quite benign" and not morally tainted in the way required by the prohibition. In reaching that view, His Honour found that:

  • Lux's sales techniques were conventional and traditional and the customers could be expected to be aware of them;
  • Lux representatives did not engage in an unfair sales tactic merely by staying in the customers' homes for a long period;
  • the contraventions of various State and Commonwealth consumer protection measures were unlikely to have affected the interactions between the representatives and the customers; and
  • a ten-day cooling off period applied to each sale and Lux's behaviour should be considered in light of the cooling-off right.

THE APPEAL

The ACCC considered that:

  • the decision set the bar for unconscionable conduct under the ACL – particularly in terms of the level of "moral tainting" required – too high; and
  • the trial judge had given too little weight to Lux's breaches of other consumer protection measures and too much weight to the cooling off period.

In a unanimous decision, the Full Court comprising of Chief Justice Allsop and Justices Gordon and Jacobson agreed with the ACCC and held that Lux had indeed engaged in unconscionable conduct in breach of section 21 of the ACL. The Full Court's decision rested on the following key findings:

  • to be unconscionable, conduct must be against conscience "by reference to the norms of society" and, in this context, "honest and fair" dealings were required by those norms 1;
  • the relevant social norms were evidenced by the various consumer protection measures which exist "in furtherance of fairness and elimination of aspects of vulnerability" 2 and with which Lux had failed to comply;
  • the trial judge failed adequately to deal with the fact that, by concealing the true purpose of each visit – i.e. to sell a vacuum cleaner and not to conduct a "free maintenance check" – Lux representatives had been deceptive from the outset, and that deception "tainted all the conduct thereafter" 3;
  • referring to one of the three particular cases, it was unconscionable to conduct a sale by "prevailing upon an elderly woman after 1 ½ hours of practised selling technique creating a sense of obligation from the subtle vulnerability of the householder, if that opportunity has been gained through deceptive practices..." 4; and
  • the existence of the cooling off right was not relevant – such a right does not operate to make good conduct which would otherwise be unconscionable 5.

IMPLICATIONS FOR BUSINESS

Unconscionable conduct cases often turn on their specific facts, and this matter is no exception. However, a number of important lessons may be drawn from Full Court's decision. In particular:

  • in applying the unconscionable conduct provisions of the ACL, the courts are now likely to be more willing explicitly to consider social norms and questions of fairness, with clear implications for all business-to-consumer dealings and a potential impact on certain business-to-business dealings (e.g. commercial interactions between large and small businesses, where there is arguably an increasing social expectation that any behaviour – even within the context of existing commercial arrangements – will be "fair");
  • other remedies available to consumers or businesses – e.g. a cooling off right under the ACL or the Franchising Code of Conduct – are unlikely to be a sufficient counterweight; and
  • where a business engages in misleading conduct or otherwise fails to comply with statutory requirements aimed at preserving honesty and fairness, or maintaining a balance of bargaining power, the risk of it then engaging in unconscionable conduct may be significantly increased, even where the business is otherwise engaging in standard industry practices.

The unconscionable conduct provisions in the ACL remain an enforcement priority for the ACCC and it will no doubt be emboldened by the comprehensive victory it achieved in this matter.

The Full Court's decision therefore represents an opportunity for all businesses, but particularly those which may be considered at a higher risk of engaging in unconscionable conduct, to revisit their contracting arrangements and ongoing business practices to ensure that any previous risk assessments are in line with the Full Court's latest thinking.

This decision also comes during a period in which the ACCC faces considerable pressure from business to test the reach of the unconscionable conduct prohibition in a business-to business context, and should be viewed in light of the Federal Coalition's promise to conduct a "root and branch" review of the effectiveness of the Competition and Consumer Act – of which the ACL is a part – should it win office in the forthcoming election.

Footnotes

1ACCC v Lux Distributors Pty Ltd [013] FCAFC 90 at [41].

2At [71].

3At [65].

4At [44].

5At [72].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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