Australia: An Introduction to Commercial Risk II

The first article in this series identified that there is a particular and unique risk in trading with, or transacting in, Australia. Part One looked at the statutory claim for misleading and deceptive conduct in trade or commerce, which is actionable regardless of intent. This part introduces the statutory claim for unconscionable conduct in trade or commerce.

Like misleading and deceptive conduct, the statutory claim for unconscionable conduct in trade or commerce arises under the Australian Consumer Law. It is worth repeating five key propositions from Part One.

Section 21 of the Australian Consumer Law provides 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 of goods and services from a person – engage in conduct that is, in all the circumstances, unconscionable. The concept of unconscionable conduct applied is expressly not limited to the unwritten law (meaning equitable principle). The main significance of this expansion is that the test may involve but does not require special disadvantage.

The result is that the statutory concept will apply much more broadly than the equitable concept, which requires a disability that was evident, with the result that there was an absence of a reasonable degree of inequality.

The test that is emerging in the authorities is elastic and remarkably subjective. It is directed at conduct that is not in good conscience, irreconcilable with what is right and reasonable, and so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience. Section 22 lists 12 subcategories of conduct that may be taken into account, but they lack definitive content and the list is non-exhaustive and not particularly informative. The bar may be higher than merely establishing unfairness or conduct that departs a norm, but how much higher is elusive. The difficulty is compounded by judicial pronouncements that the test is not prescriptive and is a matter of evaluation; that is, it will almost always be contestable, particularly within the orthodox paradigm of an adversarial market.

There has been limited guidance from the authorities as yet on the application of the statutory concept to a complex commercial or contractual setting, but it is clear enough that the commercial effect of conduct is significant and a trend has recently emerged that the conduct may well include the performance of a contract – ie, the exercise of a contractual right or function.

One convenient illustration of potential significance is to consider a stereotypical construction project. The documentary record of the bargain will be detailed and largely standard form. The information available at the tender and contracting stage will be limited and there will be asymmetries of knowledge, understanding and risk identification between the parties. There will be a proliferation of economic interests via subcontractors. And things will go wrong unexpectedly but in largely familiar ways. A dispute will emerge because the contractor wants time and money, which will be refused. Its claim will not be made in strict conformance with the contract’s requirements.

Variants on these themes apply to almost every commercial setting.

In the project context, every risk is allocated by the contractual instrument. However, pricing is never made based on that risk allocation alone. Contractors always presumptively price on the inherent assumption that their remuneration will ultimately be based on the actual cost of works performed. That is why contractors go broke. The invariable reason is cashflow – ie, the administration of the contract is incompatible with its critical path to completion.

In this example, whether the contractor has a contractual claim or not, it may well have a claim to superior relief for statutory unconscionable conduct even though its principal is doing no more than performing its contractual obligations. It may not (on large projects, almost certainly will not) have been provided all material information prior to accepting the contractual risk allocation. It may not, in light of the complexity of a manifested risk, be able to claim within the timeframes mandated by the contract. The bargain itself may be inherently unfair in the sense that it was irrational to accept a contractual risk in the circumstances.

All of these are factors that do not arise in a conventional common law evaluation but they are real and potentially potent in the context of statutory unconscionable conduct. The current debate is whether that potentiality is largely illusory in the context of a sophisticated and negotiation commercial contract. That debate has some way to run.