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ACCC v Berbatis

[2003] HCA 18 (9 April 2003) (High Court of Australia)

Overview

Facts
A number of shopping centre tenants claimed that the proprietors of the Farrington Fayre Shopping Centre (including CG Berbatis) engaged in unconscionable conduct, in contravention of s 51AA of the Trade Practices Act, when requiring tenants to abandon certain claims against the landlord if they wanted their leases renewed.

Section 51AA prohibits unconscionable conduct, in trade or commerce, within the meaning of the unwritten law.

The focus of the decision was the plight of Mr and Mrs Roberts, who wished to sell their business, the Leeming Fish Supply business. Part of the reason for needing to sell was personal - they ... They found a buyer for their business but the sale was subject to the lease being renewed. They had no option to renew. As a condition to renewal Berbatis required them to abandon claims they had made against the Landlords before the Commercial Tribunal.

The claim
It was claimed that the owners of Farrington Fayre had engaged in unconscionable conduct, in contravention of s 51AA of the Trade Practices Act, when requiring tenants (specifically the Roberts') to abandon certain claims against the landlord if they wanted their leases renewed.

The trial judge
Justice French (as he then was) found that the owners had engaged in unconscionable conduct in contravention of s 51AA when dealing with the Roberts'. His Honour noted that there was a 'marked inequality of bargaining power' between the parties such that the Roberts could be said to be suffering from a '"situational" as distinct from a "constitutional" disadvantage' - it did not 'stem from any inherent infirmity or weakness or deficiency'.

In finding the Roberts were at a situational disadvantage that was not remedied through legal advice, his Honour noted that they were suffering from emotional strain associated with their daughter's illness; this was in large part the reason they needed to sell. The illness of the daughter and the strain it put on the Roberts was known to the owners.

On appeal to Full Court of the Federal Court
Appeal unanimously allowed (joint judgment of The Court),

On appeal to High Court
Appeal dismissed 4-1 (Justice Kirby dissenting).

There was no special disadvantage - situational or otherwise - there was merely a lack of bargaining power.

The legislation

The matter relates to unconscionable conduct pursuant to s 51AA of the Trade Practices Act 1974. That provision has now been replaced by section 20 of the Australian Consumer Law, but in substantially the same terms:

Section 51AA provided (relevantly): 

(1)  A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.

Section 20 of the Australian Consumer Law (relevantly) provides:

(1)  A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law, from time to time.

 

Facts

A number of shopping centre tenants claimed that the proprietors of the Farrington Fayre Shopping Centre (including CG Berbatis) engaged in unconscionable conduct, in contravention of s 51AA of the Trade Practices Act, when requiring tenants to abandon certain claims against the landlord if they wanted their leases renewed.

Section 51AA prohibits unconscionable conduct, in trade or commerce, within the meaning of the unwritten law.

The focus of the decision was the plight of Mr and Mrs Roberts, who wished to sell their business, the Leeming Fish Supply business. Part of the reason for needing to sell was personal - they ... They found a buyer for their business but the sale was subject to the lease being renewed. They had no option to renew. As a condition to renewal Berbatis required them to abandon claims they had made against the Landlords before the Commercial Tribunal.

 

Trial

Justice French

The owners had engaged in unconscionable conduct in contravention of s 51AA when dealing with the Roberts'. His Honour noted that there was a 'marked inequality of bargaining power' between the parties such that the Roberts could be said to be suffering from a '"situational" as distinct from a "constitutional" disadvantage' - it did not 'stem from any inherent infirmity or weakness or deficiency'.

In the context of a situational disadvantage his Honour noted that

"Unfair exploitation of disadvantage amounting to unconscionable conduct may occur when an owner uses its bargaining power to extract a concession from the tenant that is commercially irrelevant to the terms and conditions of any proposed new lease."

In finding the Roberts were at a situational disadvantage that was not remedied through legal advice, his Honour noted that they were suffering from emotional strain associated with their daughter's illness; this was in large part the reason they needed to sell. The illness of the daughter and the strain it put on the Roberts was known to the owners. His Honour did observe, however, that there was unconscionable conduct even without this circumstance:

'Quite apart from that circumstance, in my opinion, the present case insofar as it involves the Roberts, discloses unconscionable conduct on the part of the owners on the two occasions in May 1996 and November 1996 in which they insisted upon the execution of a release clause by the Roberts as a condition of the grant of a new lease and assignment thereof to Mr Holland. It is of no consequence, in my opinion, that the detriment suffered by the Roberts may have been small in money terms. The way in which the owners acted, through their agent Mr Sullivan and his company, was a grossly unfair exploitation of the particular vulnerability of the Roberts in relation to the sale of their business. Whether or not they all had personal knowledge of the circumstances of the Roberts, they were fixed with such knowledge through that of Brian Sullivan and his company. The corporate respondents were therefore in contravention of s 51AA and the natural respondents knowingly involved in that contravention. ''

 

Full Court of the Federal Court of Australia

The Court of Appeal unanimously upheld the appeal by the owners.

Hill, Tamberlin and Emmett JJ

Their Honours described the findings of the Justice French at trial in the following way [emphasis added]

[61] The primary judge said that the focus of the case was on that class of unconscionable conduct, which equity would remedy, that involves the unconscientious exploitation by one person of the serious disadvantage of another to secure a disposition of property or the assumption of contractual or other obligations by the weaker party. His Honour regarded the release by one party of an obligation that another may have to it as falling within the same genus as a disposition of property. That is to say, the question was whether the owners unconscientiously exploited a serious disadvantage of the Roberts, Banlon or the Ternents to secure a disposition of property in the form of the release of their claims in the Commercial Tribunal.

[62] His Honour accepted that circumstances of inequality do not of themselves necessarily call for the intervention of equity. His Honour accepted that a party may take advantage of the disadvantage of another without necessarily acting unfairly or so unfairly, having regard to the nature of the disadvantage, that equity would intervene. Where the disadvantage or the inequality is great it may take less to discern unconscientious exploitation of it than in a situation involving less disadvantage or inequality.

[63] His Honour also accepted that, in the case of an owner of land who has leased that land to another and is asked to grant a new lease upon the expiry of the first lease, the pre-existing relationship of tenant and landlord by itself will not give rise to a situation of inequality or disadvantage which would attract the interest of equity. His Honour emphasised that there is no equitable obligation on a landlord to renew a lease simply because of the vulnerability of the tenant whose lease is expiring.

[64] His Honour observed that whether there is inequality, and the extent of it, in such circumstances, will also depend upon the size of the tenant, the quantum and reliability of the tenant’s rental payments, the extent to which the presence of that tenant will attract others and, in the context of renegotiation, the negotiating resources and advice available to the tenant. His Honour considered that a tenant operating a small business with a limited opportunity to sell the business may be in a particularly vulnerable position and therefore in a position approaching the level of special disadvantage or inequality which a landlord may not unfairly exploit.

[65] His Honour accepted that the word "special" to describe the class of disadvantage or disability which will attract the application of the doctrines of equity indicates that the requisite disadvantage will not necessarily be found in the normal run of bargaining inequality between large landlords and small tenants. However, his Honour was of the view that the circumstances in which a tenant operating a business under a lease may effectively lose the value of that business upon expiry of the lease place the tenant at a special disadvantage in dealing with the owner. His Honour accepted that such circumstances did not import any obligation on an owner to renew a lease that had expired but considered that unfair exploitation of a disadvantage amounting to unconscionable conduct may occur when an owner uses its bargaining power to extract a concession from the tenant that is commercially irrelevant to the terms and conditions of any proposed new lease.

[66] His Honour concluded that for the Owners to insist upon the Roberts abandoning their rights to proceed with bona fide litigation in relation to their rights under the existing lease was to engage in unconscionable conduct. His Honour concluded that it was unconscionable conduct on the part of the Owners, on the two occasions in May 1996 and November 1996, to insist upon the inclusion of a release as a condition of the grant of a new lease and assignment thereof to Mr Holland. His Honour characterised the way in which the Owners acted as "a grossly unfair exploitation of the particular vulnerability of the Roberts in relation to the sale of their business". His Honour concluded, therefore, that the Owners had acted in contravention of s 51AA and that their principals were knowingly involved in that contravention.

Their Honours then described the reasoning on appeal, noting that the ACCC argued that there were two separate factors of special disadvantage relevant to this case:

[71] ...

* The financial security of the Roberts depended upon their ability to sell their business, but it was difficult or impossible to sell the business without a new or extended lease of the shop in the Shopping Centre;

* As a result of their daughter’s illness, the Roberts were unable to give full attention to the protection of their own economic interests.

Their Honours noted that although Justice French had referred to the emotional strain on the Roberts relating to their daughters' condition, he made 'no finding that any such emotional strain had a causal connection' with the decision to agree to release the owners from claims against them as part of a deal to extend the lease.

[76] Thus, the essence of his Honour’s conclusion was that the relevant special disadvantage was simply the circumstance that the ability of the Roberts to sell their business depended upon obtaining the grant of a renewal or extension of their lease. Any proprietor of a business carried on in leased premises, where the goodwill of that business depends upon its location, is in precisely the same position as the Roberts. That fact alone would not constitute special circumstances that would attract the intervention of equity.

Their Honours disagreed with the trial judge that this situation constituted a special disability leading to unconscionable conduct on the part of the owners:

[80] By offering terms upon which a renewal or extension of the lease could be granted, the Roberts were, in effect, thrown a lifeline. Whether they were better off by foregoing their claims and accepting that lifeline than if the lifeline had not been offered to them may be a matter of judgment for them to make. Clearly, their judgment was that they were better off by accepting the lifeline. It would be curious, therefore, to characterise the conduct that led to that result as unconscionable.

[81] A distinction can be drawn between parties who adopt an opportunistic approach to strike a hard bargain and parties who act unconscionably... It cannot be said that the Roberts’ wills were so overborne that they did not act independently and voluntarily. Unfortunately for the Roberts, the Owners were under no obligation to renew or extend their lease. The Roberts had the choice of either maintaining their legal claims against the Owners and losing the opportunity to sell their business or abandoning their claims and gaining the opportunity to sell their business. They made that choice of abandoning their claims. That may have been a hard bargain, but it was not an unconscionable one.

[82] It is inappropriate to characterise the detriment that a tenant has by reason of the imminent expiration of a lease as a special disadvantage. His Honour appears to have accepted that proposition. His Honour erred, however, in concluding that the Roberts were under a special disadvantage such that the arrangements that they entered into in December 1996, with proper legal advice, were unconscionable. It follows that there was no contravention of s 51AA ...

Appeal upheld.

 

High Court

Appeal unanimously dismissed on 9 April 2003.

[emphasis added in extract throughout]

Chief Justice Gleeson

His Honour began by contrasting the situation that would have arisen had the lessors simply refused to renew the lease at all:

[4] It was not contended that the proper course for the lessors to follow, consistently with their obligations under the Act, was simply to have no dealings at all with the lessees, but to allow their lease to expire and to find a new tenant. That would have been an unwelcome (and costly) outcome for the lessees. It would be surprising if it were the policy of the Act to require the lessors to take that course, to the minor disadvantage of the lessors and the major disadvantage of the lessees. The practical consequence of the argument for the appellant is that the lessors, having been requested to agree to something they were entitled to refuse, were acting in contravention of the Act by imposing a condition upon their agreement. Yet if that be correct, it seems to mean that the lessors, if well advised, should simply have refused to discuss the matter of a renewal or extension of the lease.

His Honour then discussed the legislation, including making reference to the Second Reading speech when s 51AA was introduced:

[5] ... In the Second Reading speech when the legislation was introduced, it was said [Australia, House of Representatives, Parliamentary Debates (Hansard), 3 November 1992 at 2408]:

'Unconscionability is a well understood equitable doctrine, the meaning of which has been discussed by the High Court in recent times. It involves a party who suffers from some special disability or is placed in some special situation of disadvantage and an 'unconscionable' taking advantage of that disability or disadvantage by another. The doctrine does not apply simply because one party has made a poor bargain. In the vast majority of commercial transactions neither party would be likely to be in a position of special disability or special disadvantage, and no question of unconscionable conduct would arise. Nevertheless, unconscionable conduct can occur in commercial transactions and there is no reason why the Trade Practices Act should not recognise this.'

The Explanatory Memorandum referred to the decisions of this Court in Blomley v Ryan and Commercial Bank of Australia Ltd v Amadio. Those decisions were considered more recently in Bridgewater v Leahy. [footnotes omitted]

His Honour observed that 'unconscionable conduct' in the context of s 51AA is a legal and not a colloquial expression:

[7] ... In the context of s 51AA, with its reference to the unwritten law, which is the law expounded in such cases as those mentioned above, unconscionability is a legal term, not a colloquial expression. In everyday speech, "unconscionable" may be merely an emphatic method of expressing disapproval of someone's behaviour, but its legal meaning is considerably more precise.

His Honour then referred to Blomley v Ryan and Justice Fullagar's discussion of the characteristics of circumstances placing one party at a special disadvantage in dealing with another and continued:

[9] In the present case, French J said that the lessees suffered from a "situational" as distinct from a "constitutional" disadvantage, in that it did not stem from any inherent infirmity or weakness or deficiency. ...

While not determining there could be no such classes, his Honour noted that there was a risk that categorisation of this kind might be 'misunderstood, and come to supplant the principle.' The problem, his Honour observed, was that the words 'situational' and 'disadvantage' have ordinary meanings which, when combined, might extend far beyond the bounds of the law referred to in s 51AA.

[11] One thing is clear ... A person is not in a position of relevant disadvantage, constitutional, situational, or otherwise, simply because of inequality of bargaining power. Many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests. ...

[14] Unconscientious exploitation of another's inability, or diminished ability, to conserve his or her own interests is not to be confused with taking advantage of a superior bargaining position. There may be cases where both elements are involved, but, in such cases, it is the first, not the second, element that is of legal consequence. It is neither the purpose nor the effect of s 51AA to treat people generally, when they deal with others in a stronger position, as though they were all expectant heirs in the nineteenth century, dealing with a usurer. [footnote omitted]

Applied to the present case his Honour concluded:

[15] ... there was neither a special disadvantage on the part of the lessees, nor unconscientious conduct on the part of the lessors. All the people involved in the transaction were business people, concerned to advance or protect their own financial interests. The critical disadvantage from which the lessees suffered was that they had no legal entitlement to a renewal or extension of their lease; and they depended upon the lessors' willingness to grant such an extension or renewal for their capacity to sell the goodwill of their business for a substantial price. They were thus compelled to approach the lessors, seeking their agreement to such an extension or renewal, against a background of current claims and litigation in which they were involved. They were at a distinct disadvantage, but there was nothing "special" about it. They had two forms of financial interest at stake: their claims, and the sale of their business. The second was large; as things turned out, the first was shown to be relatively small. They had the benefit of legal advice. They made a rational decision, and took the course of preferring the second interest. They suffered from no lack of ability to judge or protect their financial interests. What they lacked was the commercial ability to pursue them both at the same time.

[16] Good conscience did not require the lessors to permit the lessees to isolate the issue of the lease from the issue of the claims. It is an everyday occurrence in negotiations for settlement of legal disputes that, as a term of a settlement, one party will be required to abandon claims which may or may not be related to the principal matter in issue. French J spoke of the lessors using "[their] bargaining power to extract a concession [that was] commercially irrelevant to the terms and conditions of any proposed new lease." A number of observations may be made about that. Parties to commercial negotiations frequently use their bargaining power to "extract" concessions from other parties. That is the stuff of ordinary commercial dealing. What is relevant to a commercial negotiation is whatever one party to the negotiation chooses to make relevant. And it is far from self-evident that when a landlord is considering a tenant's request to renew a lease, the existence of disputes between the parties about the current lease is commercially irrelevant to a decision as to whether, and on what terms, the landlord will agree to the request. The reasoning of French J appears to involve a judgment that it was wrong for the lessors to relate the matter of the lessees' claims to the matter of their request for a renewal of the lease. Why this is so was not explained. It formed a crucial part of the reasoning of French J and, in my view, cannot be sustained.

His Honour concluded that the Full Court of the Federal Court was correct and the appeal should be dismissed with costs.

Justices Gummow and Hayne

After outlining the facts, the background to the litigation and the statutory history, their Honours continued, noting that the Full Court had drawn a distinction between parties adopting an 'an opportunistic approach to strike a hard bargain' and those who act unconscionably within the meaning of the section [para 35].

The Full Court had also observed that it could not be said that the Roberts' will was overborne so that they did not act independently and voluntarily and that the ACCC had submitted that it was an error to construe s 51AA as requiring an overbearing of the will. Their Honours accepted that submission [para 36], noting that overbearing of the will reflects notions associated with duress rather than unconscionable conduct.

Their Honours considered the meaning of the term unconscionable and the range of uses of the term in the equity jurisdiction (from para 42). They noted that the case had been conducted on the footing that s 51AA essentially embodied the Amadio principles and that s 51AA is not used 'in any sense which is at large or reflects an ordinary or natural meaning in general usage. ...' [para 38].

Turning to the reasoning of the primary judge their Honours referred to the passage in which Justice French drew a distinction between situational and constitutional disadvantages and then turned to specific submissions on appeal.

Their Honours accepted submissions of the respondents that 'a person in a greatly inferior bargaining position nevertheless may not lack capacity to make a judgment about that person's own best interests' and that that was the case here; the Roberts' 'were under no disabling condition which affected their ability to make a judgment as to their own best interests in agreeing to the stipulation imposed by the owners for the renewal of the lease, so as to facilitate the sale by Mr and Mrs Roberts of their business.' (para 56).

[60] There were three apparent resolutions to the impasse between the parties. First, the lease might be renewed without the inclusion of cl 14 [relating to giving up the claim]. This was unacceptable to the owners; they were not obliged to grant any renewal at all and so were at liberty to prevent that outcome and thereby deprive the Roberts of their sale proceeds. The second and third possibilities were both acceptable to the owners but, given the evidence of Mr Sullivan referred to above, the second probably was preferable. The second was renewal of the lease and inclusion of cl 14; the third was no renewal and no release of the owners by cl 14. To the Roberts, the renewal of the lease (albeit giving up the other claim later shown to be worth apparently only some $3,000) was vital to the sale of the business, making the second outcome preferable to the third. Against that background, it may not be surprising that the bargain struck reflected the second outcome.

[61] It was never the case of the ACCC that the owners were obliged to deal with the Roberts by producing the first outcome, so that the owners, consistently with s 51AA, might deal with the Roberts only to the disadvantage of the owners. To conclude that the owners "extract[ed]" the agreement by the Roberts to include cl 14, as did the primary judge, mistakes the significance of the available outcomes. The owners would not agree to renew the lease without cl 14 and were at liberty to achieve that result, as his Honour accepted. To stigmatise the second (and actual) outcome appears to favour as the preferable result the third outcome whereby the owners would have had no further dealing with the Roberts, the lease would have expired and the sale lost, but the Roberts would have later received some $3,000 at the settlement.

In relation to the family circumstances, his Honour noted that Justice French concluded there was unconscionable conduct absent those circumstances. In any event, their Honours concluded that on the facts of the case, the family situation which led to the sale 'fell short of a disabling condition or circumstance seriously affecting their ability to make a judgment as to their own best interests'.

Appeal dismissed.

Justice Kirby (dissenting)

Justice Kirby dissented, finding there was unconscionable conduct. His Honour didn't hide his displeasure at the outcome favoured by the majority:

[65] Yet again the Court has before it an appeal concerning the application of the Trade Practices Act 1974 (Cth) ("the Act"). ... Yet again this Court has a choice between affording a broad and beneficial application of the relevant provision of the Act, as opposed to a narrow and restrictive one.

[66] In the proceedings at trial in the Federal Court of Australia, French J (the primary judge) found that the respondents had engaged in unconscionable conduct. As other members of this Court have found, the Full Court of the Federal Court, in allowing the appeal from his Honour's judgment, applied an excessively narrow legal criterion. Given that the relevant factual findings are undisturbed and that the primary judge did not make any error of legal principle, this Court should affirm his Honour's judgment.

Justice Callinan J

Agreed with orders proposed by Gummow and Hayne JJ in dismissing the appeal.

 

Commentary