We have previously written about the doctrine of unconscionable conduct, where we follow the developing law of both statutory and equitable unconscionable conduct.

The yo-yo starts its first play with the 2019 High Court decision in ASIC v Kobelt, which created significant uncertainty in the doctrine of unconscionable conduct (see our article here).[1] Five separate judgments were written and to complicate matters further, judicial consideration of the relationship between unconscionable conduct in equity and unconscionable conduct in the ASIC Act was not split along majority-minority lines. Kobelt left open the central question of whether statutory unconscionable conduct includes the principles set out in equitable unconscionable conduct. In particular, does statutory unconscionable conduct require a finding of special disadvantage?

The next play takes us to the 2021 decision of the Full Court of the Federal Court in ACCC v Quantum Housing Group, which provided much needed clarification on the question of special disadvantage (see our article here).[2] The Court concluded that no finding of special disadvantage is necessary for statutory unconscionable conduct. This was a major development, given that financial services institutions without any special disadvantage would now be within the purview of the statutory unconscionable conduct regime, including with respect to business-to-business interactions. The decision in Quantum Housing was solidified through the further 2021 Full Court decision in Good Living Company v Kingsmede, which reiterated that the equitable and statutory concepts of unconscionable conduct are distinct concepts.[3]

On 16 March 2022, the High Court delivered the latest instalment on unconscionable conduct – this time largely on the doctrine of equitable unconscionable conduct. Stubbings v Jams 2 Pty Ltd is an orthodox decision on equitable unconscionability, and provides useful commentary for financial services institutions on the relevant “system of conduct” giving rise to the contravention.[4] This is the first time the High Court considered unconscionable conduct since Kobelt.

While the decision in Stubbings is an orthodox one, the question of whether special disadvantage is a necessary element of statutory unconscionability remains unresolved at the High Court level. The question of special disadvantage did not require a decision as it was readily accepted that the appellant in Stubbings suffered a special disadvantage. Interestingly however, no reference is made to the Full Federal Court decision in Quantum Housing.

Unconscionable conduct 101

Unconscionable conduct, in essence, refers to conduct beyond the conscience. Equitable unconscionable conduct arose within the courts of equity largely by direction of the Amadio decision to prevent circumstances where a victim with an inability to help themselves are taken advantage of.[5] It is now settled law that equitable unconscionable conduct requires:

  • a finding of special disadvantage;
  • knowledge from the other party of the special disadvantage; and
  • predatory or exploitative conduct of the special disadvantage.[6]

Statutory intervention then led to three separate pieces of legislation, each introducing its own version of unconscionable conduct, as follows:

  • section 991A of the Corporations Act – specific to financial services;
  • sections 12CB and 12CC of the ASIC Act – specific to financial services; and
  • sections 21 and 22 of the Australian Consumer Law – general application.

Facts in Stubbings v Jams 2 Pty Ltd

The respondent in this matter (though there are several) is an entity known as Ajzensztat Jeruzalski & Co (hereafter, AJ Lawyers). For AJ Lawyers, Mr Zourkas was a consultant and intermediary, and Mr Jeruzalski was a partner of the firm. The respondents operated an ‘asset-lending business’, which for the benefit of our readers, is a form of lending not depending on the individual’s income, but instead on their readiness to mortgage assets.

The appellant was an individual with no income, who was described by the trial judge as ‘unsophisticated, naïve, and [with] little financial nouse’, and ‘completely lost, totally unsophisticated, incompetent and vulnerable’. This placed the appellant squarely in one of the circumstances for special disadvantage as was identified within Blomley v Ryan.[7]

The appellant, in his desire to purchase ‘a little house’, was encouraged by the respondents to go ‘bigger’ and was granted loans to purchase a $900,000 property on the condition that he mortgaged his existing two properties to the respondents. In an attempt to avoid the application of the National Credit Code, the respondents also required the appellant to:

  • sign certificates stating that he had received independent legal and financial advice (when he had not); and
  • certify that it was a business investment contributing to the appellant’s business Victorian Boat Clinic Pty Ltd (when it was not).

The case largely turned on the wilful blindness of the respondents who sought not to discover the incapacity of the appellant to repay the mortgage.[8]

High Court decision

The High Court decision in Stubbings is essentially a decision on equitable unconscionable conduct, not statutory unconscionable conduct. It is unclear why the pluarility (Kiefel CJ, Keane and Gleeson JJ) and Steward J did not make findings with respect to statutory unconscionability. With respect to statutory unconscionability, Gordon J does not directly address the question of special disadvantage – leaving this question open. In these circumstances, we consider the appropriate approach would be to adopt the position set down by the Full Federal Court in Quantum Housing.

While the finding of unconscionable conduct was unanimous in Stubbings, three separate judgments were written: Kiefel CJ, Keane and Gleeson JJ (writing jointly), and Gordon J and Steward J each writing separately. At a high level, the judges reached the following conclusions:

From the judgments, we deduce two central elements:

  • Knowledge through wilful blindness

The plurality (Kiefel CJ, Keane and Gleeson JJ) noted that while there may not be an “unequivocal finding of actual knowledge” on the part of the respondent, the respondent “had a lively appreciation of the likelihood that the loss of the appellant’s equity in his properties would be suffered”.[13] The exploitation of this knowledge was sufficient for a finding of equitable unconsionability.

Both Gordon J and Steward J separately comment on the respondent’s deliberate avoidance of inquiries to avoid acquiring the knowledge that might enliven the court’s jurisdiction on unconscionability.[14] Importantly, Steward J holds that such conduct amounted to wilful blindness and accordingly, the respondent must be fixed with the “knowledge which they had deliberately abstained from acquiring”[15] – as per the well-established doctrine of wilful blindness in R v Crabbe.[16] In other words, wilful blindness can be used to establish actual knowledge.

  • System of conduct

Both Gordon J and Steward J separately comment on the respondent’s “system of conduct” that was deliberately designed to prevent the respondent from acquiring the requisite knowledge needed for equitable relief. In particular, Steward J comments that the “system was, at least in this case, no more than a deliberate artifice intended to frustrate the provision of equitable relief.”[17] It is this deliberate pattern of conduct that renders the respondent’s action more egregious, as the system is designed and used as the mechanism to exploit the appellant’s special disadvantage.

Where to next?

While elements of the Stubbings decision give rise to some uncertainty in the doctrine of unconscionable conduct, important principles of knowledge and conduct are reemphasised. As noted above, as the High Court has not provided further clear commentary on the concept of special disadvantage in statutory unconscionability, we consider the appropriate approach would be to adopt the position set down by the Full Federal Court in Quantum Housing (i.e. that special disadvantage is not an essential element).

Looking more broadly at the financial services industry, increasingly, the High Court and the Federal Court are focussing on broad patterns of behaviour, systems and processes in place in financial services businesses. From social proofing in distribution in ASIC v Westpac, to deficient oversight mechanisms in ASIC v RI Advice, and the High Court’s emphasis on an artificial system of conduct in Stubbings, product and distribution architecture in financial services is fast becoming a key source of risk and liability for the financial services industry.