Litigation & Disputes

Unconscionable Conduct Under the Australian Consumer Law and Commercial Bank of Australia v Amadio


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Unconscionable Conduct Under the Australian Consumer Law and Commercial Bank of Australia v Amadio

The Australian Consumer Law (ACL) sets out a number of protections that are afforded to consumers in relation to the supply of goods and services. One of these protections is against unconscionable conduct. Sections 20-22 of the ACL cover the prohibition of unconscionable conduct. In considering a potential case of unconscionable conduct, the court will first address the matter under s 21 and the factors set out in s 22. If the conduct is not caught under the prohibitions of s 21 then the court may look to s 20 to determine the matter under the common law principles.

Section 21 of the ACL states that ‘a person must not, in trade or commerce, in connection with the supply or possible supply of goods or services to a person or the acquisition or possible acquisition of goods or services from a person engage in conduct that is, in all the circumstances, unconscionable’. Under s 21, the concept of unconscionable conduct is not limited to the common law meaning and as a result is more widely defined.  The term unconscionable is not defined in the ACL however according to its ordinary meaning, unconscionable conduct will arise where there is serious misconduct that is so against conscience that it warrants intervention by the court to grant relief. Often it will be that the circumstances surrounding the conduct are unfair and unreasonable, however there must also be an absence of morality in order to constitute unconscionable conduct.

In determining whether there has been unconscionable conduct under s 21 the court will take into consideration the factors set out in s 22 of the ACL. These factors include in particular, taking into account the bargaining power of the parties, whether the consumer was able to understand the documents to the transaction, whether there was any undue influence or pressure used against the consumer, the requirements of any industry codes, whether the supplier failed to disclose any risks or impacts to the customers interests and the extent to which the supplier and customer acted in good faith.

If the court finds that s 21 is not applicable to the circumstances, it will seek to apply s 20 and common law principles of unconscionability. The test of unconscionable conduct was developed in the case of Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. This test sets out two circumstances whereby conduct will be deemed unconscionable. The first being when ‘unconscientious advantage is taken of an innocent party whose will is overborne so that it is not independent and voluntary’ and secondly, when ‘advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interest’

In the case of Commercial Bank of Australia v Amadio, Mr and Mrs Amadio signed a guarantee and mortgage to guarantee the debts of their son’s company. They were Italian immigrants, had little English and minimal formal education and business experience. Their son (Vincenzo) lived an expensive lifestyle however was in fact in significant debt. He had told his parents that the guarantee was for a period of 6 months and for $50,000. This was not the case. Their liability was not limited in such ways; in fact, the bank had agreed to allow him to increase his overdraft.

A representative of the bank visited the home of the Amadio’s to sign the relevant documents of the mortgage. The Amadio’s did not read the documents and the bank’s representative failed to provide an explanation to Mr and Mrs Amadio about the documents that they were signing and the subsequent risks involved. The representative did however point out that the guarantee was not limited to six months, upon hearing the incorrect representation made by the Amadio’s son. In the days following the guarantee and mortgage being signed, Vincenzo’s overdraft increased from $189,000 to more than $270,000. Vincenzo’s company continued to suffer financial losses and subsequently went into liquidation. The bank then demanded that the Amadio’s make good on their guarantee to pay the debts. The Amadio’s were unable to meet the obligations of the guarantee and a notice was given that the power of sale under the mortgage would be exercised.

The majority of the High Court of Australia held that the Amadio’s had suffered a special disadvantage thus finding that the conduct of the bank was unconscionable. Justice Mason stated that unconscionable conduct refers to a situation “in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage”.

In coming to their decision, the Court took into consideration the special disadvantage suffered by the Amadio’s as a result of their minimal ability to speak English, lack of formal education and business experience, and old age. This special disadvantage suffered in conjunction with the failure of the bank to disclose the necessary facts that would allow the Amadio’s to make their own informed judgment about the transaction was held to amount to unconscionable conduct. Ultimately, the Amadio’s would not have signed the documents, had they been aware of the effect of the terms they were agreeing to.

In cases of unconscionable conduct, the court will focus on the bargaining power of the parties and in particular that of the stronger party and their conduct. The onus of proof will be upon the stronger party to show that the transaction was fair, just and reasonable. If the stronger party is unable to bear proof that the transaction was fair, just and reasonable, their conduct will be held to have been unconscionable and the transaction will be set aside.

Conclusion

The Australian Consumer Law is well equipped to protect consumers from becoming victim to unconscionable conduct through the separate avenues of the common law and statute. The protections in place are imperative to ensure that consumers enter into transactions that are fair, just and reasonable and to prevent special disadvantages from being taken advantage of by stronger parties.

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