SA Court of Appeal grapples with difference between Equitable and Statutory Unconscionability

The Commissioner for Consumer Affairs had originally brought a proceeding in the Magistrates’ Court alleging that Pitt, a real estate agent, had engaged in unconscionable conduct in his dealings with a home owner and entry into a contract that allowed Pitt to gain an option to purchase his home any time in the next 4 years for the price they had agreed in 2012.


To sum up the deal, on the same day Pitt finally settled his option to purchase the house for $175,000, he advertised it for sale at an asking price of $300,000.


Special Disadvantage?

Significantly, the home owner, Mr Hartwig, was a retired pensioner who had worked as a labourer all his life and had left school at the end of year 7. He had no understanding of commercial deals or property transactions, was a chronic gambler who had lost his entire retirement fund in the previous few years, was a borrower who was being managed by the hardship program of his bank and was unable to service his debts.


The Commissioner, who was originally unsuccessful in a claim of unconscionable conduct in the Magistrates Court, had won on appeal to a single judge of the Supreme Court of South Australia – see judgment here – where Auxiliary Justice David held that Hartwig was at a special disadvantage “because of his age, inexperience and dependence on” Pitt to sell his house so he could move into a retirement village, with the problem being that it was only Pitt who could benefit from the agreement and gain the benefit of inflation.


Appeal

On 30 April 2021 the Full Court of the Supreme Court of South Australia’s Court of Appeal has overturned the decision of Justice and held that Pitt did not engage in conduct significantly scandalous to amount to unconscionable conduct within the meaning of the ACL.


The major grounds for appeal were that:

  1. The homeowner did not suffer from a special disadvantage

  2. That Pitt did not take unconscientious advantage of the homeowner’s position

In response, the Commissioner filed a notice of contention asserting that if the narrow meaning of unconscionability founded in the common law, section 20 of the ACL, had not been satisfied, in any event the broader approach to unconscionability founded in section 21 of the ACL warranted a further finding of unconscionable conduct against Pitt by the Full Court of Appeal.


Approach

The Full Court first considered Equitable Unconscionability and stated:

"The central concern of the equitable doctrine of unconscionability is to provide relief against the stronger party to a transaction exploiting, or taking advantage of, some special disadvantage which has operated to impair the ability of the weaker party to form a judgment as to his or her interests."


The Full Court then repeated Nettle and Gordon JJ’s observations in Kobelt:

"The equitable doctrine of unconscionable conduct “looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so”. The “abiding rationale” of the doctrine is to “ensure that it is fair, just and reasonable for the stronger party to retain the benefit of the impugned transaction”.


A party will have unconscientiously taken advantage of an innocent party when the former knew or ought to have known of the existence and effect of the special disadvantage; or, put another way, when the special disadvantage was sufficiently evident at the time of the transaction to make it unconscientious to procure or accept the assent of the innocent party."


It can thus be seen that equitable unconscionability requires both the existence of a special disadvantage on the part of the weaker party, and conduct by the stronger party in exploiting or unconscientiously taking advantage of that disadvantage. These are sometimes referred to as the two limbs of equitable unconscionability


With respect to statutory unconscionability, the Full Court considered the High Court of Australia’s decision in Kobelt in detail and explained:

"The legislative choice of “unconscionability” as the key statutory concept, rather than less morally freighted terms such as “unjust”, “unfair” or “unreasonable”, confirms that the moral obloquy involved in the exploitation or victimisation that is characteristic of unconscionable conduct is also required for a finding of unconscionability under s 12CB."


The ultimate issue under the statute is whether the conduct in question is rightly to be characterised as unconscionable. In determining that issue, s 12CB calls for a judgment as to whether the impugned conduct exhibits the level of moral obloquy associated with predatory conduct.


Gageler J went on to explain that Parliament’s appropriation in s 12CB of the terminology of equity in expressing the normative standard which that section prescribes “serves to signify the gravity of the conduct” necessary to constitute a breach of that standard. His Honour added that it had been long and well understood that unconscionability “is not a slight matter, and behaviour is only unconscionable where there is some real and substantial ground based on conscience for preventing a person from relying on what are, in terms of the general law, that person’s legal rights

Decision

On appeal, the Full Court held that despite the significant challenges facing the home owner, it was not satisfied Hartwig suffered any special disadvantage (consequently ground 2 of the appeal did not need to be considered). The full bench noted that the Commissioner’s case had been pleaded narrowly and only that Hartwig was a 70 year old pensioner, had a lack of experience in commercial matters, was experiencing financial difficulties and was in a weaker bargaining position. Indeed, the Full Court observed that many otherwise relevant factors had not been submitted.


The Court observed:

"the essence of the relevant weakness is that it “seriously affects” the innocent party's ability to safeguard their own interests. Relevant matters may include, but are not limited to, “poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary”; as well as “illness, ignorance, inexperience, impaired faculties, financial need or other circumstances” that affect the innocent or weaker party's ability to protect their own interests. It is not sufficient that the matters give rise only to an inequality of bargaining power."


In so finding, the Full Court observed that the normative standard of conduct required for statutory unconscionability was not lower or any different form the standard required in equity, and that both causes of action equally demanded (with the legislature intentionally appropriating the term unconscionable in order to adopt the same level) the same normative standard be applied.


By Rob Norton and Louise Gehrig