In the Federal Court, Justice Halley recently applied the ratios from Paciocco v Australia and New Zealand Banking Group Ltd and Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd to provide a salient reminder of how courts assess the ‘breadth of departure from the expected normative standard of commercial behaviour' required to warrant condemnation at unconscionable.
In the case of Stuart v Rabobank Australia Pty Ltd [2021] FCA 1338, the Stuarts alleged Rabobank had breached s 12CB of the ASIC Act and thereby engaged in unconscionable conduct when it:
provided finance to them that was in breach of its lending policies, in that the loan was unsuitable, imprudent and pure asset lending that was not fit for purpose; and
at mediation, placing undue pressure and/or duress upon the Stuarts to sign the deed of forbearance and acknowledgement.
Facts
In 2007, the Stuarts found themselves in a position where they could no longer service a loan secured by their cattle ranch known as Evergreen. After devising a scheme where the Stuarts planned to acquire an alternative cattle property known as Mt Morris, and then sell Evergreen, they sought funding from Rabobank to execute their ‘restructure plan’.
Unfortunately, on account of the combined effect of a severe drought and the global financial crisis, the Stuarts were unable to sell Evergreen and the restructure plan fell apart.
In 2012, at a mediation between the Stuarts and Rabobank, a deed of forbearance and acknowledgment was entered into, which included a full release by the Stuarts of Rabobank from all claims it may have against them.
Despite the ‘second chance’, Evergreen remained unsold and in 2013 Rabobank appointed a receiver who liquidated both Evergreen and Mt Morris at prices well below the Stuarts’ expectations.
Assessing the normative standard of society and judging impugned behaviour’s breadth of departure
Justice Halley stepped through the relevant authorities to first set out what unconscionable conduct means and how Courts will determine whether impugned conduct was so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct offensive to conscience.
His Honour noted:
The term Unconscionable Conduct was explained in ASIC v National Exchange Pty Ltd to mean conduct that “on its ordinary and natural interpretation, means doing what should not be done in good conscience”.
That s 12CB of the ASIC Act prescribes a normative standard of conduct applicable to the supply or possible supply of financial services, with a court’s task being to:
recognise and administer that normative standard of conduct … in the totality of the circumstances”
Proscribe as unconscionable, conduct that is so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct offensive to good conscience.
Determining the normative standard of behaviour expected by society involves both a deliberation on the values and considerations found in the text, structure and context of the stature (particularly those of s 22 of the ACL) and the informing norms of equity and the common law.
Allsop CJ in Paccioco said (296):
The evaluation includes a recognition of the deep and abiding requirement of honesty in behaviour; a rejection of trickery or sharp practice; fairness when dealing with consumers; … promises freely made; the protection of those whose vulnerability as to the protection of their own interests places them in a position that calls for a just legal system to respond for their protection, especially from those who would victimise, predate or take advantage; a recognition that inequality of bargaining power can (but not always) be used in a way that is contrary to fair dealing or conscience; the importance of a reasonable degree of certainty in commercial transactions; the reversibility of enrichments unjustly received; the importance of behaviour in a business and consumer context that exhibits good faith and fair dealing ...
In turn, Gageler J in Kobelt reasoned that the determining question of whether the impugned conduct was “so far outside” societal norms as to “warrant condemnation as offensive to conscience” depended on the quality of the departure (see 59):
We would respectfully venture to suggest that the strength of the qualifying or descriptive language (“so far outside”, “warrant condemnation”, “offensive to the conscience”) should be seen as indicative of the quality of the departurefrom right commercial behaviour, explicated and articulated case by case over time, rather than be taken as definitional of some measurable departure from conscionable business conduct. … it is recognised that unconscionable conduct is not limited to the worst kind of unconscionable conduct. There may be more and less serious examples. That will reflect in penalty. The task is an evaluation of the impugned conduct to assess whether it is to be characterised as a sufficient departure from the norms of acceptable commercial behaviour as to be against conscience or to offend conscience and so be characterised as unconscionable.
Court’s decision
Halley J found that Rabobank did not act unconscionably when it agreed to provide a loan to the Stuarts or in entering the deed of forbearance.
By Rob Norton and Louise Gehrig
What is Unconscionable conduct: behaviour so harsh or unjust that it falls well outside the norms of society and is therefore offensive to good conscience. In the face of such conduct, courts have both an equitable and statutory jurisdiction to sanction that unconscionable behaviour.