Law
‘Recent Anglo-Australian Developments
Affecting Corporations – Corporate Social
Responsibility, Contractual Good Faith,
and Unconscionable Business Conduct’
By
Professor Bryan Horrigan BA, LLB (Hons) (Qld), DPhil (Oxon)
Dean, Faculty of Law, Monash University, Australia
Author, Corporate Social Responsibility in the 21st Century (2010, Edward Elgar)
Overview – Major Themes
 Comparative, legal, and practical dimensions of three distinct areas of business
regulation related to commercial morality:
– Corporate social responsibility (CSR)
– Good faith in commercial agreements
– Unconscionable business conduct
 Transnational regulatory landscape affecting corporate responsibility and
governance
 Convergence of corporate governance, CSR, and related matters
 Human rights and business as an integrated aspect of CSR
 Doctrinal promotion of good faith and fair dealing as aspects of commercial
morality:
– Express, implied, and excluded good faith obligations
– Unconscionable business-to-business and business-to-consumer
conduct
2
THE OPERATING
ENVIRONMENT FOR CSR AND
CORPORATE GOVERNANCE
3
Living in a Meta-Regulatory World
 Governance beyond formal government (eg multi-stakeholder
networks/alliances/standard-setting mechanisms)
 Regulation beyond ‘hard’ law (eg ‘soft’ laws, fiscal/policy
incentives, pro bono targets, ‘light touch’ regulatory
approaches, network-initiated standards etc)
 Standard-setting beyond national control (eg UN/OECD
standards, UK ‘enlightened shareholder value’ approach,
international ‘integrated reporting’ initiatives)
 Responsibility beyond legal compliance (eg corporate social
responsibility (CSR), social/reputational risk etc)
 Success beyond pure profit-internalisation and costexternalisation (eg sustainable business in society)
 So - multiple, overlapping, cross-sectoral drivers of behaviour
and standard-setting for business in society, not limited to the
LCD of avoiding breaches of the law
4
Major International Developments
 Changes in thinking about the basis of corporate law/regulation and corporate
governance:
– Shareholder primacy v competing policy rationales post-GFC (eg
‘responsible lending’ and ‘responsible investment’ and ‘responsible
executive remuneration’)
– Command-and-control v relationship-based views of corporate governance
– Impact of ‘the third sector’ and the CSR movement
 Mainstreaming of CSR/CGR&S in business practice - corporate law still lags
behind, but is catching up
 G8 & G20 – CSR a geopolitical policy priority
 Institutional investment & decision-making standards as investment drivers:
– Rise of ESG/SRI considerations
– Rise of CR&S-related standards (eg UN PRI)
 Transnational & international corporate governance & reporting initiatives (eg
GRI)
 UNSRSG mandate (eg business due diligence on human rights)
5
CSR Meta-Trends
• From corporate responsibility (CR) to CSR/corporate
responsibility and sustainability (eg organisational CR&S
policies)
• From add-on/marginal element of corporate governance
(CG) to integral CG element (eg accountability to
stakeholders, management of reputational risk etc)
• From financial to non-financial/integrated reporting
• From marginal to mainstream ESG/SRI considerations in
investment decision-making (eg UN PRI)
• From voluntary business CSR commitment to integrated
CSR for strategic and competitive advantage (eg Porter and
Kramer)
• From marginal CSR relevance in orthodox Anglo-American
corporate law to CSR prominence in multi-stakeholder
coalitions, principle-based regulation, and other metaregulatory influences)
• Emerging body of comparative CSR-related law and
regulation across European, Anglo-American, and Anglo- 6
Commonwealth jurisdictions
Business Reactions to CSR
• ‘Every company, like it or not, has a CSR policy. The first
issue is whether they recognise the fact, and the second is
how far they are alert to changes in what society expects of
them in this field.’ (Sir Adrian Cadbury, architect of the UK
Cadbury Code on corporate governance)
• ‘We’re future-proofing our business model.’ (Unnamed
Australian CEO, at a meeting of his company’s corporate
responsibility and sustainability working group)
• ‘Corporate social responsibility is a very broad agenda.
Please give us something we can do differently on Monday
morning to make things happen’ (common business reaction,
per World Business Council for Sustainable Development)
7
1. Reconceived societal governance,
regulation, and responsibility
+
2. Orthodox Corporate Governance
+
3. 21st century CSR (eg ESG/SRI investment)
+
4. Business model integration (ie aligned with
strategic business advantage and competitive
positioning)
=
5. New corporate governance, responsibility,
8
and sustainability (CGR&S)
Lagging Behind on CGR&S is Now a
More Risky Business Stance – For
Companies and Lawyers!
• Law firms being audited by business clients on CGR&S
factors
• Business peers using CGR&S for branding and
competitive advantage
• CGR&S values and being an ‘employer/provider of
choice’
• CGR&S values increasingly part of supply/distribution
chain standards
• Mass consumer, political, investor, and NGO pressures
towards ratcheting-up standards in line with CGR&S
values
• CGR&S values working their way into corporate legal
obligations, including corporate governance and
9
CSR AND CORPORATE
GOVERNANCE
10
CSR’s Links to Corporate Law and
Governance
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Corporate governance mainstreaming/integration
Incorporation and liquidation
Corporate capacities and powers
Directors’ duties and defences
Corporate risk management
Corporate reporting and disclosure
Shareholder engagement and remedies
Non-shareholder engagement and remedies
Investment decision-making
Corporate law’s service to public policy goals
11
Director Duties - Overview
Directors’ duties
Loyalty and good faith
Duty to act
bona fide in
the interests
of the
company
Duty to use
powers for
proper
purposes
Section 181(1)
Duty to act in
good faith in
best interests
of corporation
and for proper
purposes
Duty not to
misuse
information or
position
Sections 183,
184
Criminal offences section 184
if reckless or internationally
dishonest
Duty not to
fetter
discretions
Related party
transactions
Chapter 2E
General law
Care, diligence, and skill
Duty to avoid
actual and
potential
conflicts of
interest
Disclosure of and
voting on matters of
material personal
interest
Part 2D.1 Div 2
(sections 191-196)
Duty to use care
and diligence of a
reasonable person
subject to business
judgment rule
Section 180(1)
and (2)
Other
sections where
Corporations
Act requires
‘diligence’
Section 588G
Sections 292318
From: Farrar, Corporate Governance
Theories, Principles and Practice
(OUP 2005) page 104
Directors’ Duties & Non-Shareholder Interests
•
In Australia – consensus view:
– Directors can consider them …
– … to the extent relevant to shareholder value
– Connection needed between non-shareholder benefit & company’s
interests
– Business judgment rule offers some extra leeway
•
In USA:
– Delaware
– Corporate constituency laws (cf new UK model)
•
In the UK – new statutory duty of loyalty for directors:
– Overall duty to promote success of company for its members
– Directors must consider designated stakeholder interests (eg
employees, essential business relationships (eg suppliers), reputation
for high business standards, impact on environment and communities,
long-term consequences of decisions etc)
– Possible breach of other directors’ duties (eg care & diligence)
if not done properly
– Very limited scope for remedies against directors
for inadequate consideration of stakeholder interests
New UK Directors’ Duty
172 Duty to promote the success of the company
(1) A director of a company must act in the way he considers, in good faith, would be most likely to
promote the success of the company for the benefit of its members as a whole, and in doing so
have regard (amongst other matters) to–
(a) the likely consequences of any decision in the long term,
(b) the interests of the company´s employees,
(c) the need to foster the company´s business relationships with suppliers, customers and others,
(d) the impact of the company´s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business
conduct, and
(f) the need to act fairly as between members of the company.
(2) Where or to the extent that the purposes of the company consist of or include purposes other
than the benefit of its members, subsection (1) has effect as if the reference to promoting the
success of the company for the benefit of its members were to achieving those purposes.
(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring
directors, in certain circumstances, to consider or act in the interests of creditors of the company.
•
•
417 Contents of directors' report: business review
(2) The purpose of the business review is to inform members of the company and help them
assess how the directors have performed their duty under section 172 (duty to promote the
success of the company).
•
(5) In the case of a quoted company the business review must, to the extent necessary for an
understanding of the development, performance or position of the company´s business, include–
(a) the main trends and factors likely to affect the future development, performance and position of
the company´s business; and
(b) information about–
(i) environmental matters (including the impact of the company´s business on the environment),
(ii) the company´s employees, and
(iii) social and community issues,
including information about any policies of the company in relation to those matters and the
effectiveness of those policies; and
(c) subject to subsection (11), information about persons with whom the company has contractual
or other arrangements which are essential to the business of the company.
If the review does not contain information of each kind mentioned in paragraphs (b)(i), (ii) and (iii)
and (c), it must state which of those kinds of information it does not contain.
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(6) The review must, to the extent necessary for an understanding of the development,
performance or position of the company´s business, include–
(a) analysis using financial key performance indicators, and
(b) where appropriate, analysis using other key performance indicators, including information
relating to environmental matters and employee matters.
"Key performance indicators" means factors by reference to which the development, performance
or position of the company´s business can be measured effectively.
What Directors Must Do & Report Under New UK Business
Review
– Purpose: to inform members (not stakeholders) & help them assess
how well directors perform duties (note cross-relation to duties)
– To the extent necessary to understand the company’s business
position, listed companies must comment on:
• Main trends/factors likely to affect future of the company’s
business
• Information about company’s environmental impact, employees,
and relevant social and community issues (including information
about policies on these and the policies’ effectiveness)
• Information about company supply chain relationships (subject to
confidentiality & legal constraints)
– Must state explicitly if none of this information appears
– Must also include both financial and non-financial performance data
(eg KPIs related to environmental & employee matters)
– Important exemptions:
• small companies exempted from business review
altogether
• medium-sized companies exempted from non-financial
information
ASX CGC PROPOSALS IN
CONTEXT
17
Relevant Principles and
Recommendations
• ‘Principle 3 – Promote ethical and
responsible decision-making’
• ‘Principle 7 – Recognise and manage risk’:
– Revised Recommendation 7.1: move from
having and disclosing risk management
policies to establishing stand-alone risk
committee or combined audit/risk committee
– Q: what is a ‘material business risk’ in the new
era of integrated financial/non-financial
reporting?
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New Recommendation
• ‘Recommendation 7.4: A listed entity should disclose
whether, and if so how, it has regard to economic,
environmental and social sustainability risks.’
• Recognises enhanced global investment attention to
ESG factors
• Impact of the volume of capital now under UN PRI
expectations of ESG disclosures
• Domino effect of comparable developments in UK, HK,
Singapore etc
• Premature to mandate integrated reporting until
international framework established
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Eg Investment Product Disclosure
• Investment products include investments
in share, super, etc funds
• Investment product disclosure statement
must contain:
– ‘if the product has an investment component –
the extent to which labour standards or
environmental, social or ethical
considerations are taken into account in the
selection, retention or realisation of the
investment’ (Corporations Act s1013D(1)(l))
20
UN Principles for Responsible Investment
•
‘We will incorporate ESG issues into investment
analysis and decision-making processes.
Possible actions:
•
–
–
–
–
–
–
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Address ESG issues in investment policy statements
Support development of ESG-related tools, metrics, and
analyses
Assess the capabilities of internal investment managers to
incorporate ESG issues
Assess the capabilities of external investment managers to
incorporate ESG issues
Ask investment service providers (such as financial analysts,
consultants, brokers, research firms, or rating companies) to
integrate ESG factors into evolving research and analysis
Encourage academic and other research on this theme
Advocate ESG training for investment professionals’
21
Freshfields Advice for UN
Environment Programme Finance
Initiative
• Question: ‘Is the integration of environmental,
social and governance issues into investment
policy (including asset allocation, portfolio
construction and stock–picking or bond–picking)
voluntarily permitted, legally required or
hampered by law and regulation; primarily as
regards public and private pension funds,
secondarily as regards insurance company
reserves and mutual funds?’.
22
Freshfields Answers
• Countries: France, Germany, Italy, Japan,
Spain, UK, US, Canada, Australia
• ‘(D)ecision-makers are required to have regard
(at some level) to ESG considerations in every
decision they make….because there is a body of
creditable evidence demonstrating that such
considerations often have a role to play in the
proper analysis of investment value’
• ‘(I)ntegrating ESG considerations into an
investment analysis so as to more reliably
predict financial performance is clearly
permissible and is arguably required in all
jurisdictions’
23
HOW HUMAN RIGHTS RELATE
TO CSR, ESG, AND
CORPORATE GOVERNANCE
24
21st Century Business & Human Rights
Milestones
• Draft UN Norms on the Responsibilities of TNCs and Other
Business Enterprises with regard to Human Rights (early 21st
century)
• Initial UNSRSG appointment (mid-decade) – Harvard’s Prof John
Ruggie
• ‘Protect, respect, and remedy’ FRAMEWORK (2008-2009):
– ‘the state duty to protect against human rights abuses by business’
– ‘the corporate responsibility to respect human rights’
– ‘the need for better access by victims to effective remedies’
• Other key initiatives (2009-2010):
– Global corporate law tools project
– Human rights due diligence by business
• GUIDING PRINCIPLES (2011)
• Endorsement by UNHRC and flow-through to other major standardsetting norms (eg OECD Guidelines for Multinational Enterprises,
IFC social/environmental performance standards, Equator Principles
III)
• Standard-setting application to various arms of the legal profession
• Application to latest ASX CGC proposals?
25
•
Advice to UNSRSG - Australian Legal
Position
No general legal duty on Australian companies to respect
international human rights
•
However, there are due diligence processes in meeting general legal
obligations that involve human rights consideration:
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–
–
–
–
–
–
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corporate compliance with laws with specific human rights elements (eg
anti-discrimination, employment, and privacy laws);
business impact assessments for project and infrastructure development
(eg socio-economic impact studies, EISs, and HRIAs);
rights-related preconditions for granting governmental approvals and
licences for business infrastructure and development proposals;
compliance with directors’ duties and defences (eg adequate
consideration of the relation between rights-related stakeholder interests
and long-term corporate success);
corporate responses to shareholder action including litigation (eg
shareholder proposals, institutional investor dialogue, and climate change
litigation);
satisfaction of ESG and SRI concerns of institutional investors;
conformance with investment decision-making requirements (eg ethical,
labour, environmental, and human rights considerations in choosing or
realizing investments); and
corporate governance requirements for corporate responsibility and 26
sustainability reporting (eg reportable human rights risks and business
success drivers as ‘material business risks’).
Law
FEATURES OF THE RUGGIE
HUMAN RIGHTS TEMPLATES
27
Crux = Due Diligence
• Q: What are the elements of good human rights
due diligence?:
• A: Companies need:
– (a) a human rights policy;
– (b) a starting list of rights comprised in the
international bill of human rights and the core ILO
conventions;
– (c) standard use of human rights impact
assessments (akin to social impact statements,
environmental impact assessments etc);
– (d) integration/alignment of human rights due
diligence and company’s
systems/processes/measures (think CG here!); and
– (e) monitoring/verification and internal/external
reporting of human rights performance
28
Foundational Principle for Business
- Principle 15
‘15. In order to meet their responsibility to respect human rights,
business
enterprises should have in place policies and processes
appropriate to
their size and circumstances, including:
(a) A policy commitment to meet their responsibility to
respect human rights [#1 Integrated CSR/HR
organisational policy];
(b) A human rights due-diligence process to identify,
prevent, mitigate and account for how they address their
impacts on human rights [#2 Integrated HRDD throughout
organisation];
(c) Processes to enable the remediation of any adverse
human rights impacts they cause or to which they contribute.
[#3 Integrated monitoring/engagement/reporting
mechanisms]’
29
Law
Legal Position in UK, Australia, Hong
Kong, and Singapore on Good Faith
‘Fair Dealing and Good Faith’
 Opt-in rules for international commercial contracts (UNIDROIT principles)
 Other norms of international commercial law (eg UN Convention on Contracts for the
International Sale of Goods)
 Contract law doctrines (eg implied terms of good faith and fair dealing)
 Business and industry expectations (eg good faith in mining joint ventures,
franchises, public sector contracts)
 Choice of governing law (eg NY contract law, NSW law) in cross-border agreements
 Common law and equitable doctrines against harsh, unreasonable, exploitative
exercises of contractual/legal rights (eg relief against forfeiture)
 Multiple forms of statutory and non-statutory unconscionable conduct (eg
Competition and Consumer Act (Cth) and unconscionable dealings doctrine)
 National regulation of unfair contract terms
 Factors affecting exercises of statutory powers and discretions
31
Academic/Judicial Views on Good Faith
 ‘Good faith is inherent in all common law contract principles, and any attempt to imply an
independent term is unnecessary and a retrograde step.’ (Carter, Peden, and Tolhurst)
 ‘(T)he principle of good faith should be seen not as an implied term, but rather as a
principle that governs the implication of terms and [the] construction of contracts
generally.’ (Carter and Peden, discussed in Ng Giap Hon v Westcomb Securities [2009]
SGCA 19)
 ‘In our view, there is no good reason why an express agreement between contracting
parties that they must negotiate in good faith should not be upheld.’ (HSBC Institutional
Trust Services (Singapore) Ltd v Toshin Development Singapore Pte Ltd [2012] SGCA 48)
 ‘[Good faith is] a concept which means different things to different people in different
moods at different times and in different places.’ (North American view, > 25 years ago)
 ‘The mistrust of Anglo-Saxon jurists for the general concept of good faith is equalled only
by the imagination which they put towards multiplying particular concepts which lead to the
same result.’ (European view)
32
Ongoing Transnational Controversies
 Is an obligation to negotiate in good faith enforceable?
 How pervasive is good faith in the construction of commercial
agreements?
 Can good faith be implied in some or all commercial agreements?
 Under what conditions is good faith implied into a commercial
agreement?
 Are good faith obligations co-extensive or otherwise interactive with
related obligations of contractual cooperation and fidelity?
 What are the elements and limits of good faith?
 Can obligations of good faith be modified or excluded by agreement?
33
Landmark Cross-Jurisdictional Case Law
 Australia:
– Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002]
HCA 5
– multiple intermediate appellate court decisions from early 1990s to 2012
 UK:
– Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116
– Yam Seng Pte Ltd v International Trade Corporation [2013] EWHC 111 (Feb 2013)
– Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd
[2013] EWCA Civ 200 (March 2013)
– TSG Building Services v South Anglia Housing [2013] EWHC 1151 (May 2013)
 Hong Kong:
– GDH Ltd v Creditor Co Ltd [2008] 5 HKLRD 895
 Singapore:
– Ng Giap Hon v Westcomb Securities Pte Ltd [2009] SGCA 19 (implied term)
– HSBC Institutional Trust Services (Singapore) Ltd v Toshin Development
Singapore Pte Ltd [2012] SGCA 48 (express obligation to negotiate in good faith)
34
Current Australian Legal Position
• Mixed results over time on whether good faith is implied in commercial
agreements
• No general term implied by operation of law that:
– parties must act in good faith when negotiating a contract
– parties must exercise good faith in performing a contract
• Good faith terms can be implied in specific contracts (eg employment
contracts, franchising contracts, or if contract otherwise void for uncertainty)
• Current academic/judicial debate over:
– What good faith means (eg honest disclosure, non-arbitrariness, reasonableness
– and what kind of reasonableness?)
– Correlation/overlap with cognate obligations (eg cooperation, mutual fidelity)
– Whether some notion of good faith underlies all or much contract law doctrine
– Whether good faith is an extra term or a rule of construction (ie the method of
incorporation)
– Whether existing judicial approach of implying good faith terms is correct
– What method for implying terms applies in particular circumstances
– Limits of good faith obligations in contract (eg legitimate commercial expectations)
– Limits to excluding contractual good faith by drafting devices
– Relationship between good faith in contract and lack/breach of good faith as an
aspect of unconscionable business conduct
35
Law
Client-Focused Negotiating Stances and
Drafting Approaches on Good Faith
Drafting Perspectives on Good Faith
 ‘(M)y present feeling is that an attempt contractually to exclude the duty to act
honestly would fail [and] what foolhardy entity would be prepared to contract on
that basis anyway [but] the possibility of contractually excluding an obligation to
act reasonably in [the] objective sense is much more arguably open.’
(Australian state supreme court CJ (de Jersey CJ))
 ‘Commercial parties are now faced with the question of whether they dare to
suggest in negotiations that they are not prepared to perform in ‘good faith’ as
that may require reasonableness on their part. Alternatively, should they
expressly state that they will not behave reasonably, or will that be a “dealbreaker”?’ (Prof Peden)
 ‘Whether you characterise the question as one of ‘good faith’ or of the court
believing that it has more wisdom than the parties to determine what is
reasonable, the practitioner has a problem … A clear clause will embarrass the
judiciary into submission.’ (Canadian practitioner, 1985)
 ‘I find arresting the suggestion that an “entire agreement” clause is of itself
sufficient to constitute an express exclusion of an implied duty of good faith and
fair dealing.’ (Prominent Australian academic/judge (Paul Finn), 2003)
37
Client-Focused Analysis of GF Options
 #1: Relevant industry standard/expectation? (eg mining JVs, franchising)
 #2: Relevant client preference/need? (eg public v private sector contexts)
 #3: Effective combination of clauses for exclusion, eg:
–
–
–
–
–
‘entire agreement’ clause
‘sole discretion’ clause
‘negation of implied terms’/exclusion clause (ie not just GF?)
‘no other/additional obligations’ clause (ie to cover things beyond implied terms)
‘no other dilution of our client’s position by operation of law, to the extent it can be
excluded’ clause (ie to maximise exclusionary effect)
– flow-on effect of mixed express/silent treatment of GF throughout agreement
 #4: Other means/doctrines that condition exercise of contractual rights and surrounding
conduct – unfair, arbitrary, unreasonable, and unconscientious exercises of powers and
discretions
 #5: Supervening regulation by law regardless of parties’ private agreement:
– limiting doctrines (eg limits on exclusion clauses)
– legislative intrusion (eg ‘unfair contract terms’ and ‘unconscionable conduct’ laws)
– other regulation (eg codes of conduct)
38
Multi-Level Drafting Options on GF
 Use ‘choice of governing law’ clause as default GF position:
– cross-border transactions (eg law of NY)
– Australian jurisdiction (eg NSW v Victoria)
 Remain silent – leave it to the courts to imply down the track
 Impose express, general, and undefined GF obligation on some/all
parties
 Impose express, general, and defined GF obligation on parties
 Define/confine GF throughout the contract:
– Only some parties in some contexts
– Only for some stages of the contract
 Exclude GF to the extent lawfully possible
39
Corporate, Finance, Resource, Infrastructure Precedents
 Common contexts for express good faith elements (especially when in both
parties’ interests and therefore binds both):
–
Disclose in good faith
–
Negotiate in good faith
–
Take all actions in good faith and with due diligence
–
Certifying/warranting in good faith
–
Transfer/purchase/valuation options
–
Use of information
– Standard law firm precedents using/raising good faith issues:
–
Business/share sale agreements
–
Schemes of arrangement
–
Mining JV
–
Finance and security agreements
–
Project/construction agreements
–
Public sector contracts
40
Drafting Examples – Express Good Faith (Qld Case)
 ‘The parties warrant that they shall perform all duties and act in good
faith.
Acting in good faith includes:
(a) being fair, reasonable, and honest;
(b) doing all things reasonably expected by the other party and by the
Subcontract; and
(c) not impeding or restricting the other party’s performance.’
41
Drafting Examples - Vodafone Case
Clauses
24.1 Exclusion of Warranties and representations
(a) (Exclusion) To the full extent permitted by Law and other than as
expressly set out in this Agreement the parties exclude all implied terms,
conditions and warranties.
(b) …..
(c) (MI has made own inquires) MI acknowledges and declares to
Vodafone that, in making its decision to become Vodafone Billing
Services' non-exclusive agent service provider on the terms of this
Agreement, it has carried out all feasibility studies, inquiries,
investigations and due diligence exercises that it considers necessary
and prudent, and it has consulted its own independent professional
consultants (including accountants and legal advisors) on such matters
as the terms of this Agreement and the profitability and viability of
performance under this Agreement.
42
Drafting Examples - Vodafone Case
Clauses
44.
Entire Agreement
This agreement contains the entire agreement of the parties with
respect to its subject matter. It sets out the only conduct relied on
by the parties and supersedes all earlier conduct by the parties
with respect to its subject matter.
43
Ng Giap Hon v Westcomb Securities [2009] SGCA 19
‘Entire Understanding
This Agreement embodies the entire understanding of the parties and
there are no provisions, terms, conditions or obligations, oral or written,
expressed or implied, other than those contained herein. All obligations of
the parties to each other under previous agreements ([if] any) are hereby
released, but without prejudice to any rights which have already accrued
to either party.’
44
Law
Good Faith as an Indicator in Statutory
Regulation of Unconscionable Business
Conduct in both B2B and B2C
Transactions
‘Hot’ Industry Areas for UC/GF Regulation
 Loan and security arrangements
 Financial services and advice
 Share dealings and investments
 Franchising
 Commercial leasing
 Building and construction
 Telecommunications
 Termination/default contexts (all areas)
 ACCC Chairman Rod Sims (Feb 2012): ‘Unconscionable conduct
between businesses is another area of attention this year and one of
particular concern to small business ... Proving UC is, of course, a high
hurdle, but where it occurs the ACCC will not hesitate in taking action.’
46
Unconscionable Conduct Relates to …
 Various equitable causes of action and bases for relief
 Statutory unconscionability under Competition and
Consumer Act
 Statutory unconscionability in financial services under
ASIC Act
 Unconscionable financial services licensee conduct
under Corporations Act (s991A)
 Unjust contracts laws (eg NSW Contracts Review Act)
 Industry codes (eg Banking/Franchising Codes)
 State retail/commercial leasing laws
47
Three Basic Forms of Statutory Unconscionability
 General prohibition - unconscionable conduct:
-
Old TPA s 51AA (in trade practices generally)
New CCA ACL, section 20
ASICA s 12CA (in financial services)
Corporations Act s 991A (financial services licensees)
 Unconscionable conduct in retail/personal/consumer contexts (ie
B2C unconscionability):
-
Old TPA s 51AB
New CCA ACL, sections 21 and 22
ASICA sections 12CB and 12CC
 Unconscionable conduct in big/small business contexts (ie B2B
unconscionability):
-
Old TPA s 51AC
New CCA ACL, sections 21 and 22
- ASICA sections 12CB and 12CC
- Some state commercial/retail leasing Acts
48
ACCC v Lux Distributors P/L [2013] FCAFC 90 (15
August 2013)
 Latest ACCC test case
 B2C context, not B2B
 Facts predate the latest statutory unconscionability reforms
 Old (not harmonised) list of unconscionability indicators (eg no ‘good
faith’ indicator)
 No mention of latest additions (eg new principles of interpretation) in the
judgment
 Judicial rethink on how ‘moral obloquy’ works in this field of regulation
 Very far from being the last word on statutory unconscionability
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Competition and Consumer Act 2010 (Cth) (As of 6
June 2012)
20 Unconscionable conduct within the meaning of the
unwritten law
(1) A person must not, in trade or commerce, engage in
conduct that is unconscionable, within the meaning of
the unwritten law from time to time.
50
Strands of Unconscionable Dealing
• AMADIO-Type UC
• Weaker party under a special
Wife (or other close
disadvantage
relationship?)
• Special disadvantage can be
personal (eg illiteracy)
Guarantees husband’s
• Special disadvantage can also be
personal/business debts
financial, legal, or informational (ie
Failure to understand
‘situational’)
• Disadvantage affects weaker
A volunteer (no benefit)
party’s capacity to decide best
No or inadequate explanation
interests
Relevant factors known to bank • Stronger party knows and takes
advantage of that disadvantage
Bank remedial actions
• Exploitation of that disadvantage
inadequate
in the circumstances is against
‘good conscience’ in legal terms
 GARCIA-Type UC







51
Meanings & Levels of Unconscionability
Regulation
Under ‘the Unwritten Law’ (4 categories as described by Paul Finn):
– [1] Unconscionability as the underlying concept for Equity as a whole
– [2] Unconscionability as an element or finding that is essential for specific
equitable actions (eg estoppel, relief against forfeiture, unconscionable
dealings, unilateral mistake etc)
-
Coercion/exploitation/advantage-taking
Unconscionable exercise of rights, retention of benefits etc
– [3] Doctrines & remedies associated with unconscionable dealings &
exploitation, advantage-taking, and defective understanding:
–
–
–
‘spousal guarantees’ rules (eg Yerkey v Jones, Garcia)
‘special disadvantage’ rule (eg Amadio/Berbatis)
Others (eg Bridgewater v Leahy)
– [4] Unconscionability as a direct ground of relief in its own right,
unmediated by conventional doctrines (eg Lenah Game Meats v ABC)
•
NB Only [2] or [3] are viable possibilities – still open to argument
52
Full Fed Ct in ACCC v Samton Holdings
 Unconscientious exploitation of a party’s special
disadvantage (eg Amadio)
 Defective understanding, relationship of influence, and
absence of independent explanation (eg Garcia)
 Unconscionable departure from previous representation
(eg estoppel – Verwayen, Waltons Stores v Maher)
 Relief against forfeiture and penalty (eg Legione v Hateley
and Stern v McArthur)
 Rescind contracts for unilateral mistake (eg Taylor v
Johnson)
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Competition and Consumer Act 2010 (Cth)
21 Unconscionable conduct in connection with goods or services
(1) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person
(other than a listed public company); or
(b) the acquisition or possible acquisition of goods or services from a
person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
Competition and Consumer Act 2010 (Cth)
21 Unconscionable conduct in connection with goods or services
(4)
It is the intention of the Parliament that:
(a) this section is not limited by the unwritten law relating to unconscionable conduct; and
(b) this section is capable of applying to a system of conduct or pattern of behaviour, whether
or not a particular individual is identified as having been disadvantaged by the conduct or
behaviour; and
(c) in considering whether conduct to which a contract relates is unconscionable, a court’s
consideration of the contract may include consideration of:
(i) the terms of the contract; and
(ii) the manner in which and the extent to which the contract is carried out; and is
not limited to consideration of the circumstances relating to formation of the contract.
55
Spigelman CJ in A-G (NSW) v World Best
Holdings [2005] NSWCA 261
 ‘Over recent decades legislatures have authorised
courts to rearrange the legal rights of persons on
the basis of vague general standards which are
clearly capable of misuse unless their application is
carefully confined. Unconscionability is such a
standard … Unconscionability is a concept which
requires a high level of moral obloquy. If it were to
be applied as if it were equivalent to what is “fair”
or “just”, it could transform commercial
relationships.’
56
Competition and Consumer Act 2010 1974 No. 51
(Cth) (As of 6 June 2012) (Annotations in ‘[ ]’)
22 Matters the court may have regard to for the purposes of section
21 [Non-Exhaustive List of 12 Statutory Indicators of B2C and
B2B UC]:
(a) [relative bargaining positions] the relative strengths of the bargaining
positions of the supplier and the customer; and
(b) [beyond legitimate commercial interests] whether, as a result of
conduct engaged in by the supplier, the customer was required to comply
with conditions that were not reasonably necessary for the protection of
the legitimate interests of the supplier; and
(c) [understanding of documents] whether the customer was able to
understand any documents relating to the supply or possible supply of
the goods or services; and
57
Competition and Consumer Act 2010 1974 No. 51
(Cth) (As of 6 June 2012)
(d) [undue influence, unfair tactics, and duress] whether any undue
influence or pressure was exerted on, or any unfair tactics were used
against, the customer or a person acting on behalf of the customer by the
supplier or a person acting on behalf of the supplier in relation to the supply
or possible supply of the goods or services; and
(e) [equivalent pricing and circumstances] the amount for which, and the
circumstances under which, the customer could have acquired identical or
equivalent goods or services from a person other than the supplier; and
(f) [equivalent treatment] the extent to which the supplier’s conduct
towards the customer was consistent with the supplier’s conduct in similar
transactions between the supplier and other like customers; and
(g) [code compliance I] the requirements of any applicable industry code;
and
58
Competition and Consumer Act 2010 1974 No. 51
(Cth) (As of 6 June 2012)
(h) [code compliance II] the requirements of any other industry
code, if the customer acted on the reasonable belief that the supplier
would comply with that code; and
(i) [non-disclosure] the extent to which the supplier unreasonably
failed to disclose to the customer:
(i) any intended conduct of the supplier that might affect the interests of
the customer; and
(ii) any risks to the customer arising from the supplier’s intended conduct
(being risks that the supplier should have foreseen would not be apparent
to the customer); and
59
Competition and Consumer Act 2010 1974 No. 51
(Cth) (As of 6 June 2012)
(j) [contractual terms, progress, and conduct] if there is a contract between the supplier and the
customer for the supply of the goods or services:
(i) the extent to which the supplier was willing to negotiate the terms and conditions of the
contract with the customer; and
(ii) the terms and conditions of the contract; and
(iii) the conduct of the supplier and the customer in complying with the terms and
conditions of the contract; and
(iv) any conduct that the supplier or the customer engaged in, in connection with their
commercial relationship, after they entered into the contract; and
(k) [unilateral variation] without limiting paragraph (j), whether the supplier has a contractual right
to vary unilaterally a term or condition of a contract between the supplier and the customer for the
supply of the goods or services; and
(l) [good faith] the extent to which the supplier and the customer acted in good faith.
60