The decision indicates that unless there is substantive unfairness (unfair tactics, for example),unconscionable conduct and unfair terms remain difficult to prove.

Businesses already examining their standard form contracts should be taking this opportunity to review them for possible penalty clauses, following the recent High Court decision in Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28 that found late payment fees charged by the ANZ on its credit cards were not unenforceable penalties

The High Court also rejected the customers' argument that the late payment fees were unconscionable or unfair contract terms, contrary to the new provisions in the ASIC Act and the Australian Consumer Law (ACL). This note considers the implications that this aspect of the decision is likely to have on consumer contracts, such as rental agreements or telco and broadband contracts, especially if there are hidden costs that are disproportionate to the actual loss.

The statutory regimes: unfair contract terms and unconscionable conduct

Two new consumer protection regimes were invoked in Paciocco but neither was found to be applicable:

  • the law which renders void "unfair" contractual terms;
  • the law which prohibits "unconscionable conduct".

The new unfair terms laws apply to:

  • the supply of financial services to consumers under the ASIC Act;
  • (via the ACL) all other goods and services supplied to consumers, and
  • from November this year, supplies to small business for less than $300,000 or if the contract lasts more than year, less than $1 million).

The unconscionable conduct laws can apply to any business supplies or purchases, so long as the "victim" is not a listed public company.

On 1 January 2012, the ACL and the ASIC Act were amended to unify the provisions prohibiting unconscionable conduct in connection with consumers and businesses, and to include interpretative principles which confirmed that:

  • the terms of the contract and the manner in which the contract is carried out must both be considered in determining whether conduct is unconscionable; and
  • the statutory prohibition against unconscionable conduct is not limited by the equitable or common law doctrines of unconscionable conduct.[1]

When is a term "unfair"?

An "unfair term" is one which "causes a significant imbalance in the parties' rights and obligations…to the detriment of the consumer". The statute at relevant times in Paciocco did not refer expressly to the need to consider whether the term was "reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term" (but its current equivalent does, and this is a significant issue to consider).

A variety of other factors were however relevant, for example, whether "the term was individually negotiated", and whether "the term…[penalises] the consumer but not the supplier for a breach or termination of the contract".

When is conduct unconscionable?

There is no specific definition of "unconscionable conduct" in the ASIC Act or the ACL.

At a broad level, Chief Justice Allsop in the Federal Court has associated the phrase with something that is "irreconcilable with what is right or reasonable" and conduct "that has no regard for conscience" and involves a "high level of moral obloquy". The High Court in Paciocco did not depart from this analysis.

Factors that the court may take into account in determining whether conduct is unconscionable include:

  • the relative strengths of the bargaining positions of the parties;
  • whether a condition was reasonably necessary for the protection of a legitimate interest;
  • the existence of any undue influence, pressure or unfair tactics;
  • whether a party could have acquired identical or equivalent goods or services from a third person.

Look at the big picture, says the High Court

The majority emphasised the need to consider the totality of the circumstances in determining whether conduct is unconscionable or whether a term is unfair. The provisions did not leave it open to the customers to "pick and choose" the factors which best suited his or her case.

In finding for the ANZ, the majority noted that the appellants focused too heavily on the strengths of the ANZ's bargaining position and on whether the late fees were shown to be necessary to protect the legitimate interests of the bank, while failing to give credence to the following facts:

  • the fees were clearly disclosed and the appellant could and did understand them;
  • there was no evidence of undue influence or pressure leading to the appellant to sign the contracts;
  • the appellant could have terminated the contract or sought a credit account at another bank; and
  • the late fee could have been avoided at any time, by the appellant keeping to his contractual card limits.

Justice Keane (repeating Chief Justice Allsop's comments in ANZ v Paciocco) added that high fees of themselves are not enough to show the contract is unfair:

"In all the circumstances, in particular, the lack of any proven predation on the weak or poor, the lack of real vulnerability requiring protection, the lack of financial or personal compulsion or pressure to enter or maintain accounts, the clarity of disclosure, the lack of secrecy, trickery or dishonesty, and the ability of people to avoid the fees or terminate the accounts, I do not consider the conduct of ANZ to have been unconscionable. To do so would require the court to be a price regulator in banking business in connection with otherwise honestly carried on business in which high fees were extracted from customers."

What are the lessons to be learned?

Clear disclosure of fees and charges or other terms can go a long way to head off claims that the agreement is unfair or unconscionable.

Also, if the consumer or small business can avoid the fees or charges by being vigilant or careful, or if they are able to easily walk away from the agreement with little or no repercussions, the potential for successful allegations of unfairness or unconscionability are likely to be significantly reduced.