The case for good conduct

Published:
01 Apr 2002
Author:
Millton Cockburn & Grant Levy
Source:
Property Australia

In February the full Federal Court handed down its long-awaited decision in the case of ACCC v Samton Holdings Pty Ltd. For the second time in only eight months, the full Federal Court in Perth has rejected the Australian Competition & Consumer Commission’s (ACCC) attempt to expand the scope of unconscionable conduct in the retail sector.

In June last year, in the case of CG Berbatis Holdings v ACCC, the Court overturned the trial judge’s finding that the landlord of Farrington Fayre Shopping Centre acted unconscionably, in breach of the Trade Practices Act.

In the Samton case, the full Court in Perth again found against the ACCC, this time upholding the trial judge’s decision that the landlord of a lunch bar at Canning Vale did not act unconscionably.

The outcomes of these cases can mean only that, despite Federal Government concerns, unconscionable conduct does not appear to be prevalent in the retail sector.

A few years back, the Federal Government was so concerned with anecdotal evidence of unfair treatment by large landlords against small retailers that it allocated specific funds to the ACCC to run test cases. Despite the existence of this legal ‘war chest’, very few cases have been issued by the ACCC.

However, what is perhaps more telling is that, as can be seen from these two decisions, the courts do not necessarily agree with the ACCC’s definition of ‘unconscionable conduct’.

 

What is Unconscionable Conduct?

The law of unconscionable conduct seeks to prevent a stronger party from taking unfair advantage of a weaker party. This uneven bargaining power often arises in the landlord/tenant relationship.

According to the Trade Practices Act, for a breach of s51AA to occur, a weaker party needs to establish that:

  • The weaker party was under a special disability
  • The stronger party knew, or ought to have known, of that special disability
  • The strong party took unfair advantage of that situation.

 

The Facts

In 1996, Frank and Marie Rinaldi purchased a lunch bar business at Canning Vale in WA for $205,000. The lease was due to expire in June 1997 and contained a seven-year option. The Rinaldis did not exercise the option within time and thus faced the prospect of substantial losses.

The landlord refused to extend the time to exercise the option. After heated discussions between the parties and threats of litigation, the landlord said they would grant the lease if the Rinaldis paid an additional $70,000. This payment would have breached the WA retail tenancy legislation’s prohibition on a tenant being required to pay “key-money”. The landlord devised a way around this prohibition, by granting a lease to a shelf company under its control (Samton Holdings) which then granted the lease to the Rinaldis in return for the $70,000 payment.

The Rinaldis operated the business until June 1998 when it was sold for $180,000. For the 1998 financial year, the Rinaldis made a profit in excess of $100,000.

In February 1999, the ACCC issued Federal Court proceedings against Samton Holdings, all its directors and also against the landlord’s solicitor who devised the mechanism to avoid the key-money prohibition.

 

Initial Decision

The Trial Judge agreed with the ACCC’s submission that the Rinaldis were under a special disadvantage and that the landlord was aware of this. His Honour held:

“... the fact that they had no real choice but to meet the demanded payment or suffer a far greater loss, put Mr and Mrs Rinaldi in a position of special disadvantage. If they did not pay the $70,000, they stood to lose their home and at least $145,000.”

The Judge concluded, however, that the landlord had not acted unconscionably. He said that the landlord had acted opportunistically and had struck a very hard bargain, but that its conduct fell short, though not far short, of being unconscionable.

 

Appeal Decision

In a setback for the ACCC, the three Appeal Judges agreed with the Trial Judge’s decision that the landlord had not acted unconscionably. They then went further, however, and expressed the view that they did not believe the Rinaldis were under a special disadvantage.

The Appeal Judges thought it highly relevant that, as conceded by the ACCC, the landlord was under no obligation to offer the Rinaldis a new lease once they missed the deadline to exercise the option. Given this, the full Court found it was not unconscionable for the landlord to offer the new lease on conditions that included a lump sum payment.

The Appeal Judges also thought it relevant that the Rinaldis were in this predicament as a result of their own neglect and that Mr Rinaldi was an experienced businessperson.

 

Conclusion

Like the Berbatis case, this case was issued under s51AA of the Trade Practices Act as the conduct complained of occurred prior to 1998.

In 1998 a second unconscionable conduct provision (s51AC) was added to the Trade Practices Act. Although not entirely clear, it appears that this new provision will interpret unconscionable conduct more liberally and may even have resulted in different decisions in both Berbatis and Samton. However, s51AC has yet to be adequately tested by the courts.

The approach taken by the Federal Court in Perth highlights that courts will look very closely at the conduct complained of and will not simply find unconscionable conduct where a stronger party drives a hard bargain in negotiating with a weaker party.

This may not be the last we hear from the courts on these two cases. In Berbatis, the ACCC has made an application to the High Court to appeal. As Property Australia went to press, no date had been set for that application. It is not known whether the ACCC will make a similar application to the High Court in the Samton case.

 

 

Industry Repercussions – by Milton Cockburn

Nearly four years after section 51AC of the Trade Practices Act began operation in July 1998, and nearly 10 years after the broader section 51AA began, we still have little understanding of what “unconscionable conduct” means in business-to-business relationships.

The term is not defined in either section, although section 51AC attempts to give guidance to the courts by way of a non-exhaustive list of factors that should be taken into account in assessing whether conduct is unconscionable. It is very much a case of the legislature telling the judiciary: “we don’t know what it is but you will recognise it when you see it.”

That has not proved to be the case. After four years of case law we can conclude that the Australian Competition and Consumer Commission (ACCC) and the Federal Court have very different visions of unconscionable conduct.

The outcomes of Federal Court cases in CG Berbatis Holdings Pty Ltd v ACCC (more commonly known as the Farrington Fayre case) and in ACCC v Samton Holdings Pty Ltd reveals obvious disagreements between the ACCC and the Federal Court over what constitutes unconscionable conduct. The Farrington Fayre case also reveals disagreement within the Federal Court over where to draw the line between driving a hard bargain and behaving in an unconscionable manner.

Admittedly, both cases were brought under section 51AA since the behaviour complained about occurred prior to July 1998 and in both cases it appears the result could have been different if the action had been brought under section 51AC. But this is little comfort. If the ACCC and the Federal Court are finding difficulty grappling with such a nebulous concept as unconscionable conduct it is a matter of real concern for business.

There are probably three conclusions to be drawn from this confusion.

First, the allegations and anecdotal evidence of allegedly unconscionable behaviour in landlord and tenant relationships were always vastly exaggerated and were never properly evaluated. There is no better example of this than the silly emotive sentence which opened the retail tenancy chapter in the House of Representatives Report “Finding a Balance: Towards Fair Trading in Australia” (the Reid Report) in May 1997: “There is a war going on in shopping centres around Australia, between retail tenants and property owners and managers”. It was this report, however, which led directly to the introduction of section 51AC.

Second, and following on from this, the ACCC has had difficulty finding examples of unconscionable behaviour. It is no secret that over the last few years the ACCC has had special budgetary allocations to take test cases under section 51AC. It is also no secret that the ACCC has had its sights set on one of the ‘big guns’ of the property industry. Very few cases have been launched, however, and these have mainly been over franchising disputes.

Third, and no doubt this is a factor in the ACCC finding few examples to prosecute, the law has undoubtedly led to behavioural changes. A lack of prosecutions does not necessarily mean a law is not working.

The introduction of section 51AC (and before that section 51AA), has caused landlords to place much greater emphasis on staff training and compliance procedures to ensure that they do not run the risk of unconscionable conduct in dealings with tenants.

The ACCC, itself, has played an important role in this education process. Through its publications and seminars it has helped educate landlords and tenants about their rights and responsibilities under the law and has put a great emphasis on mediation of disputes.

Unfortunately, the lack of scalps hanging from the ACCC’s belt has already been wrongly used as evidence the law is too remote, too costly and too unwieldy for retail tenants. This has led to the rush of moves to ‘draw down’ section 51AC into State and Territory retail tenancy legislation. The Shopping Centre Council of Australia has not opposed this ‘draw down’, provided the relevant State legislation ensures proper standards of judicial administration.

There is an even greater danger from the ACCC’s apparent lack of judicial success. This may mean the ACCC is panicked into looking for prize scalps rather than continuing with its emphasis on mediation and successful outcome of disputes. ‘Landing a big one’ may become its primary goal rather than the successful resolution of industry disputes.

The ACCC has a dual role – it is an enforcement agency and it is also a body which, through education and mediation, assists businesses (large and small) to comply with the Trade Practices Act. The confusion over what constitutes unconscionable conduct is a sound reason why the ACCC should give greater emphasis to this second role over the first role.

 

Grant Levy is a partner with Melbourne law firm Maddocks grant.levy@maddocks.com.au
Milton Cockburn is the Executive Director of the Shopping Centre Council of Australia –   mcockburn@nat.propertyoz.com.au