The impact of Section 51AC of The Trade Practices Act 1974 (Cth) on commercial certainty.

• Jurisdiction: Australia
• Author: Brown, Liam
• Date: 01 December 2004

[Section 51AC of the Trade Practices Act 1974 (Cth) was introduced in 1998 to protect small business from unconscionable conduct. This initiative was taken following a number of government reports that highlighted the exploitation some small businesses suffer at the hands of larger businesses. This article argues that legislative intervention in this context is justified and that the mechanism adopted by s 51AC is appropriate. Indeed, the provision is neither likely to undermine commercial certainty nor have a significant impact on business activity. The Australian judiciary has thus far been cautious in its approach to the interpretation of obligations contained in the provision, limiting its use to cases that satisfy a threshold test of demonstrated 'serious misconduct' during contractual formation or performance, or 'bad faith' in the exercise of contractual rights. This balanced approach accords with nearly 50 years of experience with a comparable statutory commercial unconscionability provision in the United States.]

CONTENTS I Introduction II Classical Contract Theory and General Law Unconscionability A Classical Contract Theory and Economic Background B General Law Unconscionability III The Protection of Small Business and Statutory Unconscionability IV The Legislative Provisions--Expanding Unconscionability A The Protection Offered by Section 51AA B The Protection Offered by Section 51AC V Good Faith and Its Impact on Certainty VI The United States Experience A Comparing Contract Law in Australia and the United States B Unconscionability under the Uniform Commercial Code C Good Faith and Unconscionability in the United States D Parallels between Unconscionability in Australia and the United States VII Judicial Caution with Section 51AC A Trickle or Flood? B The Scope of Section 51AC 1 Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd 2 Hurley v McDonald's Australia Ltd 3 Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd 4 Summary of the Case Law C Good Faith? 1 Automasters Australia Pty Ltd v Bruness Pty Ltd 2 Boral Formwork & Scaffolding Pty Ltd v Action Makers' Ltd D The Direction of Australian Case Law VIII Conclusion I INTRODUCTION

Part IVA of the Trade Practices Act 1974 (Cth) ('TPA') contains three sections that prohibit corporations from engaging in unconscionable conduct: ss 51AA, 51AB and 51AC. Section 51AC was added to the TPA in 1998 following concerns that existing statutory and common law causes of action did not adequately protect small businesses against unfair or exploitative conduct. To achieve this protection, s 51AC proscribes 'conduct that is, in all the circumstances, unconscionable' (1) in connection with dealings with small businesses. Some commentators view this legislatively-imposed standard of business behaviour as an affront to the fundamental legal and economic need for commercial certainty. (2) Uncertainty is said to arise because s 51AC empowers courts to review contractual dealings not according to rational rules of coherent application, but against nebulous behavioural standards based on fairness. This article will show, however, that the extent of commercial uncertainty is well controlled by the provisions of s 51AC, where the content of business conduct proscribed can be ascertained with adequate clarity. This has been evinced by a developing jurisprudence that requires satisfaction of a threshold before the section will apply. This threshold has been articulated as the existence of 'serious misconduct or something clearly unfair or unreasonable' (3) on the part of the defendant. Serious misconduct involves pre-contractual misbehaviour or an absence of good faith or other abuses during contractual performance.

Section 51AC forms part of a modern trend in the law towards legal evaluation of the normative conduct of commercial dealings, and attempts to free such transactions from morally reprehensible conduct. (4) Some commentators have argued that allowing the court to inquire into a business relationship on the basis of unconscionability causes such a degree of commercial uncertainty that large businesses would be loathe to deal with small businesses. Further, overall transaction costs would rise and there would be an explosion of litigation. (5) On the other hand, it has been suggested that the small business sector is such an important part of the economy that providing protection from exploitation is essential to prevent unfair hardship and maintain market integrity. (6)

It has been over five years since the commencement of s 51AC, but the existence of a broad judicial discretion to review commercial contracts according to their fairness continues to cause controversy. This article shows that the effect of s 51AC on commerce is likely to be minimal because the behavioural obligations imposed by s 51AC can be defined with sufficient clarity and the judiciary has exhibited caution in the use of the section. This observation is supported by an examination of the United States experience with a comparable statutory commercial unconscionability provision. Recent case law indicates that s 51AC undoubtedly has the potential to erode commercial certainty in some areas, (7) but counterbalancing this is a desire to increase contractual fairness. Moreover, a generally restrained judicial response is likely to ensure that this delicate balance is not tipped too far in either direction.

Part II of this article examines the economic background against which classical contract theory developed, and the socioeconomic changes tied to a subsequent shift towards individualised fairness. It also considers the equitable doctrine of unconscionability. Part III examines the legislative and political history of s 51AC to identify the problem that the provision was intended to remedy and the controversy surrounding its implementation. Part IV discusses the structure and operation of the section in order to identify the legislative tools used to achieve the policy aims outlined in Part III, the expanded notion of unconscionability embodied in s 51AC, the sources of the uncertainty thereby created and the mechanisms used to resolve it. Part V investigates the potential for s 51AC to undermine fundamental contractual principles and increase uncertainty during business dealings. Part VI compares the operation of the section with statutory unconscionability in the US. Finally, Part VII analyses litigation involving s 51AC to ascertain current judicial trends and the effect that this litigation has had on certainty and commercial obligations.

This article concludes by demonstrating that the legislative response embodied in s 51AC to the problem of unfair commercial practices was justified and will not cause disastrous commercial ramifications. Although s 51AC involves the imposition of broad and seemingly ill-defined obligations, this protection is essential to ensure the vitality of small business and healthy market competition. Experience with statutory standards of business conduct in the US shows that, with cautious judicial application, the business community has little to worry about in this regard. In any case, the standard of behaviour demanded should not be difficult to meet as it accords with traditional relational contracting standards of honesty and fairness in business dealings. (8)

II CLASSICAL CONTRACT THEORY AND GENERAL LAW UNCONSCIONABILITY

A Classical Contract Theory and Economic Background

It is instructive to evaluate s 51AC against the background of classical contract theory and economic efficiency. Indeed, the legislative history of the section is linked to both of these concepts. Economic efficiency is enhanced to some extent by principles of classical contract theory, (9) which enables businesspeople to plan their transactions and allocate the risks of their business relationship to those willing and best able to accept them. (10) This is achieved by holding people to the bargains that they have made. However, absolute rules of strict application can lead to harsh outcomes, especially where the contractual relationship involves parties of unequal power and resources. At general law, courts developed principles which recognised that, in certain circumstances, contractual promises should not be enforced because of the existence of exploitative or unfair circumstances. (11)

By the 19th century, western society had undergone a substantial transformation from an economy dominated by village markets and farm-based industry to 'global' markets and factory-based production. This social and economic change coexisted with, and was to a large extent dependent upon, laissez-faire ideology. (12) Laissez-faire economic philosophy attributed the advancement of society to the self-interested struggle of the individual within a market free from government interference. (13) This, in turn, relied on secure and certain transactions provided by robust and predictable rules of commercial behaviour, which were contradictorily enforced by the non-interfering state. (14)

It was in the crucible of the 19th century free market that contract law as we know it took shape. It was supported by the tenets of caveat emptor, freedom to contract and the sanctity of the contract. (15) The maxim 'caveat emptor' was based on the idea that the individual is in the best position to judge his or her own interests. Consequently, it was left to individuals to protect their own interests when entering contracts. Freedom and certainty of contract were based on the ideas that efficient market transactions require commercial players to have the liberty to contract with whoever is willing, and that once promises are made they must be kept. Effectively, the state delegated law-making power to the parties involved that could, by mutual agreement, formulate the precise rules regulating their relationship. This was premised on a 'concurrence of intention' (16)...