Sham price increase results in $7.5m judgment


The New South Wales Court of Appeal has refined and clarified the meaning of unconscionable conduct pursuant to section 22 of the Competition and Consumer Act 2010 (Cth) (ACL), and its predecessor under the Trade Practices Act 1974 (Cth) (TPA), in its recent decision in the matter of Ipstar Australia Pty Ltd v APS Satellite Pty Ltd [2018] NSWCA 15


This decision provides some valuable insights into the standard of conduct required by businesses to avoid the unconscionable conduct provisions of the ACL.


Louise Gehrig and Rob Norton successfully acted for APS Satellite Pty Ltd (APS) in a proceeding brought against IPSTAR Australia Pty Ltd (IPSTAR), a wholesale supplier of broadband equipment and satellite bandwidth services. 


Facts

After entering into a supply contract with IPSTAR and rolling out roof mounted satellite dishes across rural and regional Australia in 2007, APS was quickly inundated with customer complaints about faulty equipment and an inability to obtain a reliable internet connection. 


Defective Equipment

By early 2010, IPSTAR confirmed it was aware of defects in its equipment and advised all wholesale customers it would accept liability and fund repairs/replacement. At the same time, APS was incurring substantial costs to replace the faulty hardware with new, often similarly faulty, IPSTAR equipment.


However, despite the undertaking to accept liability for faulty equipment, IPSTAR made the claim recovery process impossible for APS to comply with by requiring all faulty equipment to be shipped to Thailand for assessment and the provision of such a comprehensive documentary trail for the substantiation of each of more than 4,000 individual claims that it was impossible to provide.


Based on APS' failure to fully document each and every claim, despite clear and consistent evidence of the same faults in all pieces of equipment, IPSTAR rejected all of the claims.


Price Hike

Whilst the parties remained in dispute about the cost of replacement of the faulty satellite dishes, the contract for IPSTAR’s continued supply of broadband data fell for renewal.


Without explanation, IPSTAR increased its costs for broadband data by 20%. At the same time IPSTAR left the supply cost to APS’s competitors at the same level.


During the trial process APS's solicitors discovered that IPSTAR had calculated the full cost of complying with its hardware statutory warranty commitments under the TPA and A


CL and was instituting a new pricing structure for APS only that would recoup that (unexpended) cost just in case it was eventually compelled by a court to fund the cost of replacement.


First instance decision

On 22 December 2016, His Honour Justice Rein held, amongst other things, that:

  1. The satellite dishes and modems supplied by IPSTAR were not of an acceptable quality and not fit for the purpose for which they were supplied. IPSTAR was ordered to pay the sum of $1,837,792 in connection with those claims, together with pre-judgment interest in the sum of $779,602.08 and costs; and

  2. IPSTAR had acted unconscionably by raising its prices to recoup losses it anticipated it may have to pay under the TPA. IPSTAR was ordered to pay the sum of $3,482,367 in connection with that claim, together with pre-judgment interest of $856,074.49 and costs.

The decision on appeal

The Court of Appeal held IPSTAR had acted unconscionably because it resolved to impose a price increase on APS that had been calculated to fund its exposure to statutory warranty claims it had rejected.

As Leeming JA summarised (at 272):

“On Ipstar’s case, it had calculated a price increase based on a liability to pay claims, while at the same time refusing to pay any of them.”

Implications of the decision in considering unconscionable conduct

As part of its consideration of the meaning of the term ‘unconscionable conduct’, the Court of Appeal reviewed previous judicial explanations of the term's meaning, including re-characterisations such as “doing what should not be done in good conscience”, requirements for a “high level of moral obloquy”, “moral tainting” and “conduct against good conscience by reference to the norms of society that is in question”.


Bathurst CJ (with whom Beazley and Leeming JJA agreed) started from the need to understand what were acceptable community values, standards and norms prevalent in society (as was adopted in Lux Distributors Pty Ltd [2013] FCAFC 90 and Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525) and then simply asking the question:

“has there been such a departure from those accepted community standards to objectively be seen as against good conscience?” (at 195)

Bathurst CJ went on to explain (at 196):

“it involves a consideration of all the circumstances to conclude whether or not the conduct in question falls below acceptable norms, standards or values such as to warrant it being determined to be unconscionable.”

To determine the community standard against which the impugned conduct is to be assessed, the Court of Appeal confirmed the following considerations ought to be taken into account:

  1. The terms and factors set out in section 22 of the ACL;

  2. The approach taken by courts in cases involving the unwritten law of unconscionability;

  3. Judgments in other common law areas that involve a “want of good faith”;

  4. That good faith means “compliance with honest standards of conduct”; and

  5. All the circumstances of the surrounding transaction, including:

  6. The communications between the parties;

  7. Market conditions the parties are operating under; and

  8. The matters which in fact are motivating both parties.


Authors: Louise Gehrig and Rob Norton

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