CONSUMER LAW – where company admitted to unconscionable conduct by a system or pattern of behaviour in contravention of s 21 Australian Consumer Law (ACL) – where penalties and declarations agreed with regulator – where primary judge found the majority in Australian Securities and Investments Commission v Kobelt [2019] HCA 18 considered s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) requires exploitation of some disadvantage or vulnerability by a stronger party and therefore s 21 of the ACL also requires those features to be present in the conduct – primary judge not satisfied investors, to whom the company’s conduct was directed, could be characterised as vulnerable or exploited – primary judge found no contravention of s 21 – whether judge found exploitation of a special disadvantage in the equitable sense is required under s 21 – whether Kobelt, precedent or statutory interpretation requires that exploitation or taking advantage of some pre-existing vulnerability, disadvantage, or disability is a necessary element of statutory unconscionability under s 21 ACL – appeal allowed.
[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.
[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.
[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.
Consideration
[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.
[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.
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AGLC
Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd [2021] FCAFC 40
Case
[2021] FCAFC 40
Decision Date
CaseChat Overview and Summary
The Federal Court was asked to decide if Quantum Housing Group Pty Ltd (QHG) had engaged in unconscionable conduct in contravention of section 21 of the Australian Consumer Law (ACL). QHG had been involved in a scheme to encourage investors in properties that qualified for government subsidies under the National Rental Affordability Scheme (NRAS) to switch their property managers to ones preferred by QHG. The Australian Competition and Consumer Commission (ACCC) argued that QHG's actions were unconscionable, but the primary judge disagreed. The court had to determine whether the primary judge was correct in finding that the conduct did not involve the exploitation of a vulnerability or disadvantage by QHG's investors.
The Court found that the primary judge had misinterpreted the High Court's decision in Australian Securities and Investments Commission v Kobelt, which held that unconscionable conduct under the ACL requires exploitation of some disadvantage or vulnerability. The Court clarified that while exploitation or taking advantage of a vulnerability is a factor, it is not the only requirement. The conduct must also be "offensive to the conscience" and outside acceptable commercial behaviour. The Court held that the primary judge's interpretation was too narrow and did not properly apply the statutory interpretation principles. The Court found that QHG's conduct, which pressured investors into switching property managers under false pretences and without disclosing commercial associations, did amount to unconscionable conduct under section 21 of the ACL.
The appeal was allowed, and the Court made several orders. It declared that QHG had engaged in unconscionable conduct between February 2017 and July 2018 by implementing a plan to switch property managers for NRAS-qualified properties. The Court also amended the orders to include that the former director, Ms. Howe, was knowingly involved in QHG's contraventions.
Orders
Orders of the court
1. The appeal be allowed.
2. The declaration set out below be read as 4A in the orders made on 9 June 2020 in WAD 229 of 2019.
3. Order 5 of the orders made on 9 June 2020 in WAD 229 of 2019 be amended such that it reads: The second respondent (Ms Howe) was a person knowingly concerned in QHG's contraventions, as declared in paragraphs 1 to 4A.
THE COURT DECLARES THAT:
4. In the period February 2017 to July 2018, in trade or commerce, in connection with the supply or possible supply of services to investors, QHG engaged in an unconscionable system of conduct in contravention of s 21 of the ACL by devising the Roll Up Plan being a plan to encourage investors to transfer the management of properties that qualified for incentives under the National Rental Affordability Scheme (NRAS) to property managers who were related to, or preferred by Mr Fenn, who had a commercial association with QHG, and then implementing it in a planned, deliberate and sustained way including by:
(a) knowingly taking advantage of its superior bargaining position relative to the investors as a result of the investors' reliance on QHG to receive the NRAS incentive and because they could not change to another approved participant;
(b) issuing escalating rounds of letters in which deliberately false representations were made to at least 450 investors and which unduly pressured those investors to switch property managers; and as the rounds of correspondence progressed, the pressure on investors increased;
(c) not disclosing to investors its commercial associations with the approved property managers;
(d) unilaterally imposing the accreditation guidelines on investors and their property managers, including a requirement that a $10,000 security deposit be paid by property managers not approved by QHG, without any legitimate justification for the purpose of excluding property managers who were not approved by QHG;
(e) threatening investors who had not changed to a QHG preferred property manager by issuing notices stating that they were in default under their agreement with QHG which governed their entitlement to the incentive under the NRAS;
(f) when there was a refusal by a property manager to pay the security deposit, using that refusal as a basis to refuse to renew Portfolio Management Agreements with property managers and then pressuring investors to appoint a QHG approved property manager; and
(g) causing the investors of at least 260 properties to cease using their existing property managers and switching to a QHG approved property manager,
in the circumstances identified in paragraphs 8 and 51(1) to (10) of the trial judgment, including:
(h) QHG was in a superior bargaining position relative to the Investors as a result of the Investors' reliance on QHG to receive the NRAS incentive and because they could not change to another approved participant;
(i) the security deposit requirement was not reasonably necessary to protect the legitimate interests of QHG and investors would not be protected financially by the property manager paying the security deposit;
(j) investors using existing property managers were not at risk of losing their incentives;
(k) there was no legitimate reason why the existing property manager could not continue to manage the property; and
(l) QHG had commercial associations with the approved managers associated with Mr Fenn including Tebter Property Pty Ltd, Ethan Residential Pty Ltd and Quantum Property Australia Pty Ltd and failed to disclose to the investors those commercial associations.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
Neither QHG nor Ms Howe participated in the appeal. Anticipating this course by them, the Court requested the ACCC to organise counsel to fulfil the role of a contradictor. Arrangements were made for this and Dr Higgins SC and Mr Tran instructed by a lawyer from the Australian Government Solicitor appeared as contradictors. May we say at the outset that the Court was assisted greatly by, and was and is grateful for, the quality of the assistance provided by the contradictors and by counsel and solicitors who appeared for the ACCC, Ms Sharp SC, Ms Forrester and Mr Mossop and Corrs Chambers Westgarth. The facts Prior to its liquidation, QHG was in the business of arranging investments in properties that qualified for incentives under the National Rental Affordability Scheme (NRAS) established by the Commonwealth Government in 2008. Through the NRAS, financial incentives were offered to Approved Participants to build and offer rental accommodation to low and middle income earners by way of a subsidy. From at least August 2011, QHG was an Approved Participant in the NRAS. It proceeded to enter into agreements with the investors who were private investors wishing to be involved in the NRAS by purchasing rental properties from an Approved Participant such as QHG. Whether and to what extent the financial incentives of the NRAS were to be passed on to the investors was a matter to be negotiated between each such investor and QHG. Generally speaking, the agreements between the investors and QHG were in a standard form and it was commonplace for the appointment of a property manager to manage the investor’s property in a manner that ensured ongoing qualification for the NRAS incentive. From 2017, following an agreement entered into for the sale of the business, QHG’s management devised a plan, described as the Roll Up Plan, the execution of which constituted the conduct which the ACCC alleges was unconscionable in contravention of s 21 of the ACL. Ms Howe, was the sole director and secretary of QHG at the time that the Roll Up Plan was devised. However, the conduct was being driven by Mr Ashley Fenn who controlled another company that had been an Approved Participant for the purposes of the NRAS prior to its liquidation. He also controlled entities involved in the operation of the business that provided management services to investors who had purchased properties under the NRAS. Ms Howe is a former director of one of Mr Fenn’s companies and had been employed in various capacities in entities controlled by Mr Fenn since 2013. The parties agreed that, between February 2017 and July 2018, QHG’s conduct in implementing the Roll Up plan had the following characteristics (taken from [8] of the reasons):(1)QHG was in a superior bargaining positioning in dealing with investors by reason that it was the Approved Participant in the NRAS and received the incentives.(2)Under the arrangements for the NRAS, investors were dependent on QHG in order to receive their incentive because if QHG did not lodge a statement of compliance for their property it would be in breach under the NRAS and the incentive would not be paid.(3)The bargaining position of QHG was enhanced by the fact that under the arrangements for the NRAS at the relevant time, investors could not change to another Approved Participant.(4)QHG took advantage of the fact that investors relied upon QHG in order to continue receiving their NRAS incentive by formulating and implementing the Roll Up Plan.(5)The aim of the Roll Up Plan was to pressure all of the investors who had agreements with QHG to arrange to obtain property management services from property managers identified as approved by QHG.(6)QHG did not disclose to investors its commercial associations with the approved property managers.(7)QHG issued rounds of misleading correspondence to at least 450 investors that were designed to interfere with the contractual relationships between the investors and their property managers by unduly pressuring investors to terminate their relationships with the property managers and change to a property manager approved by QHG.(8)As the rounds of correspondence progressed, the pressure on investors increased.(9)As part of the implementation of the Roll Up Plan, QHG unilaterally imposed Accreditation Guidelines on its investors.(10)Amongst other things, the Accreditation Guidelines required the property manager of an investor to pay a security deposit of $10,000 if the investor did not transfer the management of their property to a QHG approved property manager.(11)The imposition of the security deposit was directed to excluding property managers who were not approved by QHG.(12)The security deposit was without any commercial justification or purpose. It only protected QHG in circumstances where QHG required no further protection because it had the benefit of an indemnity in the agreements with investors as well as insurance maintained by the property managers.(13)In its communications with investors, QHG justified the requirement for the security deposit on the basis that QHG would suffer loss and damage if an investor did not receive its incentive under the NRAS because it had provided assurances to investors that would require full reimbursement from the property manager when that was not true.(14)QHG also maintained that the security deposit would protect investors when that was not true.(15)Eventually investors who had not changed to a QHG preferred property manager were issued with notices stating that they were in default under their agreement with QHG which governed their entitlement to the incentive under the NRAS.(16)A number of the property managers who managed properties for the investors who were not QHG approved property managers objected to providing the required security deposits.(17)When there was a refusal by a property manager to pay the security deposit, QHG used that refusal as a basis to refuse to renew agreements and then to pressure investors to appoint a QHG approved property manager.(18)During the period of the conduct, the management of at least 260 properties was transferred by individual investors to a QHG approved property manager.(19)The fact that the conduct by which the Roll Up Plan was implemented caused a number of investors to change the management of their property to a QHG preferred property manager (being the aim of the conduct) is not disputed.
Evidence
Evidence Before The Court
Full text does not contain this section.
Decision
Reasons for decision
It is unnecessary to set out further the detailed agreed facts. They justify, however, as was common ground at the appeal, that the facts amply support the conclusion that the impugned conduct would be aptly summarised as we have at [4] above. The primary judgment The primary judge’s reasons for concluding that there was no unconscionable conduct are contained in [18] to [35] of the reasons. The conclusion as to lack of unconscionability was derived from the primary judge’s reading of the various judgments in Kobelt in the High Court. At [20] and [21] of the reasons, the primary judge referred to [14] and [15] of the judgment of Kiefel CJ and Bell J and concluded (at [21]) as follows:… Therefore, in the view of their Honours an essential part of the provision was the protection of the vulnerable and the conduct had to involve taking advantage of that vulnerability in a manner that might be characterised as predatory or exploitative. At [22] of the reasons, the primary judge referred to the judgment of Gageler J in particular at [87], [88], [92] and [93] and emphasised what his Honour saw as the significance of Gageler J’s description of unconscionable conduct as “being worthy of condemnation because of its gravity in the sense that it was far outside what was acceptable”. At [23] of the reasons, the primary judge referred to [115], [116], [118] and [119] of the judgment of Keane J, in support of the proposition that unconscionable conduct under the statute “required an element of exploitation, variously described as exploitation, victimisation, unconscientious conduct or a predatory state of mind.” At [24] to [26] of the reasons, the primary judge referred to the judgment of Nettle and Gordon JJ, especially at [157] and [234], and said (at [26]) that:Therefore, Nettle and Gordon JJ appear to describe a standard that may not have the characteristics of predation or victimisation described by Kiefel CJ, Bell and Keane JJ or of the gravity described by Gageler J. However, their Honours did describe unconscionability in terms that required that there be vulnerability and an exploitation of that vulnerability. At [27] of the reasons, the primary judge referred to the judgment of Edelman J (who agreed with the reasons of Nettle and Gordon JJ). That agreement and the expression of view of the primary judge at [26] as to the content of Nettle and Gordon JJ’s views meant that the primary judge said (at [27]) that Edelman J “must also be taken to accept that unconscionable conduct requires that there be a taking advantage or exploitation of a vulnerability of another a party”. At [28] of the reasons, the primary judge recognised that the approach of the minority in Kobelt (Nettle, Gordon and Edelman JJ) “did not favour an interpretation of the standard that required a high degree of moral disapprobation”. His Honour then continued as follows about the majority:… Kiefel CJ, Bell and Keane JJ emphasised the need for victimisation, exploitation or a predatory state of mind. Kiefel CJ and Bell J referred, with apparent approval, to the view of the Full Court of this Court that moral obloquy had a role to play but was not a substitute for the statutory words: at [60]. Keane J found that the statute 'imports the "high level of moral obloquy" associated with the victimisation of the vulnerable': at [118]. Gageler J recanted the use of the term moral obloquy for the reason that it 'has the potential to be misleading to the extent that it might be taken to suggest a requirement for conscious wrongdoing': at [91]. However, as noted above, his Honour expressed the view that for conduct to be unconscionable it must be so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience.