MANAGING UNCONSCIONABLE CONDUCT RISK - Mark L Carkeet,
Partner
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
$1million.
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.
Administering Contracts
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.
Enforcing Contracts
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.
Conclusion
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.
For further information please contact:
Ralph Ayling Direct phone: (+61 2) 9210 4805 E-mail: Click Contact Link
Paul Ali Direct phone: (+61 2) 9210 4961 E-mail: Click Contact Link Direct fax: (+61 2) 9210 4691
Minter Ellison 44 Martin Place Sydney NSW 2000 AUSTRALIA
Phone:(61 2) 9210 4444
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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.
Mondaq Ltd, 1998 - +44 (0) 171 820 7733
