MANAGING UNCONSCIONABLE CONDUCT RISK - Mark L Carkeet,
By introducing a general prohibition on unconscionable conduct in small business transactions, the Federal Parliament has deliberately introduced another uncertainty into the Australian corporate and commercial environment.
Parliament has said that, in time, judges will clarify the meaning of the term 'unconscionable', just as they have clarified the meaning of misleading or deceptive conduct within section 52 of the Trade Practices Act.
Undoubtedly, they will. But corporate counsel want to act now to manage the risks of unconscionable conduct and don't have the benefit of any real case law to assist them.
This article outlines a few steps that corporate counsel can take that should begin to mitigate unconscionable conduct risk.
What the Law Says
The new prohibition on unconscionable conduct was introduced into the Trade Practices Act by the Trade Practices Amendment (Fair Trading) Act 1998. It provides that a corporation (a 'supplier') must not in trade or commerce in connection with the acquisition or supply of goods or services to a person or corporation (a 'business consumer') engage in conduct that is 'in all the circumstances, unconscionable'.
The term 'unconscionable' is not defined, but Parliament has provided a non-exhaustive list of the circumstances that a court may take into account in determining whether or not conduct is unconscionable. Those circumstances include all the old tests for unconscionability that existed under Amadio's case (e.g., special disability of one party, use of undue influence, etc.) together with a new list of factors, which include:
- (a)the bargaining positions of the parties;
- (b)whether the conduct was 'reasonably necessary for the protection of the legitimate interests of the supplier';
- (c)the circumstances under which the business consumer could have acquired identical or equivalent goods or services from another supplier;
- (d)'the extent to which the supplier's conduct ... was consistent with the supplier's conduct in similar transactions between the supplier and other like consumers';
- (e)unreasonable failure by the supplier to disclose any intended conduct that might affect the interests of the business consumer and any risks to the business consumer arising from that conduct;
- (f)the negotiability of contract terms; and
- (g)whether the supplier and business consumer acted in good faith.
The new prohibition does not apply to the supply of goods or
services to listed public companies or to the supply or
possible supply of goods or services valued at more than
When Will the New Risk Apply?
In simple terms, the risk of unconscionability arises at four points in a commercial arrangement. These are:
- (1) when drafting a standard form contract;
- (2) when entering into a contract;
- (3) when the contracts is administered; and
- (4) when a dispute or default arises under a particular contract.
Drafting of Standard Form Contracts
1. Review standard form contracts
In my experience, when a standard form contract is first drafted a number of provisions are often included that suppliers later do not choose to enforce. With the introduction of the unconscionable conduct provision, I think it is time to review the terms of standard form contracts and see whether any of those provisions can now be deleted.
By doing this, I think that corporate counsel will assist in establishing that the remaining provisions of the contract are 'reasonably necessary for the protection of legitimate interests of the supplier' for the purposes of the legislation.
2. Consider further reducing the contract to 'plain English'
Many corporations have already gone a considerable way down the track of reducing their standard form agreements to plain English. My view is that you don't need to go overboard on this issue, because the commercial relationship covered by the agreement often is inherently complicated.
However, revising standard form contracts to determine whether an ordinary consumer is 'able to understand them' will go a long way towards establishing a paper trail for the purposes of unconscionable conduct.
3. Prepare standard form variations for common special cases
The underlying duty imposed by the Act is to treat like people in like circumstances in a like manner. It follows that if you can establish a consistent way of treating 'special' cases, e.g., by drafting standard form special conditions and guidelines for their use, then your chances of avoiding unconscionable conduct are increased.
Entering into Contracts
4. Make sure the customer has access to independent legal advice
This is simply a means of managing the old Amadio's case risks. The usual way of ensuring that this has happened is to require the other party or their solicitor to sign a certificate to that effect.
5. Make sure the customer understands its obligations
A more vexed question is whether you can form a view that the other party is 'able to understand any documents relating to the supply of the goods or services'.
I think the correct thing to do in that situation is to have the relevant contract manager sign a certificate to that effect or to keep a record to that effect on his or her file.
6. Consider whether the contract should be negotiated
Two contradictory principles apply here. The legislation requires a consideration of the extent to which the supplier's conduct in the particular situation was consistent with the supplier's conduct in other situations. However, the legislation also requires a consideration of the extent to which the supplier was willing to negotiate.
I think the result of this is that if a party asks for changes to a standard form contract, you have a duty to understand why they want those amendments. It is then important to document and have on file the reasons for refusing to agree to an amendment.
7. Make sure that proper disclosure is made
This duty is part of the general section 52 duty to avoid misleading conduct. Silence is "conduct" within the meaning of section 52. If, by not saying something, you mislead the other party, you are in beach of the section. For example, in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, the vendor of a home unit off the plan failed to disclose that vehicle access to the property was by licence over Crown land rather than over land owned by the body corporate. In the circumstances of the case, his silence was found to be misleading.
How often have you heard someone trying to encourage someone else to sign a contract say "Just sign the contract and we will put it in the draw, mate. We'll talk when a problem arises".
Under the new unconscionable conduct provisions, this will not be good enough. Corporations will have to prepare and deliver a series of guidelines for the consistent administration of contracts, so that there is a degree of uniformity in treating issues such as:
- (a)waiver or non-enforcement of minor breaches;
- (b)imposition of interest on late payments; and
- (c)informal grace periods for default.
Again, there is a general duty to treat people in like
circumstances in a like way.
This, I expect, is where most disputes will arise and where most new law will be developed. In particular, I think most law will develop around the reasonableness of the decision of a supplier to terminate a relationship like a franchise or a lease, to indemnify an insured, or to enforce a mortgage or call up a guarantee.
The first thing to do is to ensure that the internal approval process that takes place taken into account the unconscionability provisions.
In making a decision to enforce, I think you can draw the following general principles:
- You need to consider whether the conduct towards the business consumer has been discriminatory in any way when compared to conduct towards other customers in like circumstances.
- You need to consider whether contractual power has been used to gain some form of collateral advantage for the enforcing party. For example, in a retail tenancy, has the landlord pushed up rents simply because it wants to use the space for other purposes?
- The case law on landlord and tenants suggests that, in considering the reasonableness or unconscionability of a decision, you need to consider the question of whether disproportionate harm will be caused to one party by the enforcement of the decision. I think that, in general, the supplier will have to be satisfied that a breach has no real prospect of being remedied before it can terminate.
- Unreasonable conditions cannot be imposed.
The law of contract that we studied at University is now underpinned by two duties-one of full disclosure (underwritten by section 52 of the Trade Practices Act), and one of fair dealing (underwritten by the new section 51AC). Unless businesses pay proper attention to ensuring compliance with these duties, they will not get proper value for the contracts they write.
Eight Steps to Avoiding Unconscionable Conduct
- 8. Trim unnecessary conditions from standard form contracts.
- 9. Prepare guidelines for use of special conditions.
- 10. Have evidence that contracts have been explained.
- 11. Form a judgment on whether the customer 'was able' to understand its obligations.
- 12. Consider and document reasons for refusal to agree to amendments.
- 13. Develop guidelines for uniform administration of contracts.
- 14. Build unconscionability risk into enforcement decisions.
- 15. Consider the following in enforcement decisions:
- (a)whether customers in like circumstances have been treated in the same way;
- (b)whether the decision delivers some collateral advantage;
- (c)the harm that is caused to other party; and
- (d)whether there is a reasonable prospect that a breach can be cured.
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The information contained in this article has been prepared by the Minter Ellison Legal Group.Professional advice should be sought before applying the information to particular circumstances.
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