The New South Wales Court of Appeal has refined the meaning of unconscionable conduct pursuant to section 22 of the Competition and Consumer Act 2010 (Cth) (ACL), and its predecessor provisions of the Trade Practices Act 1974 (Cth) (TPA), as it applies to business transactions in its recent decision in the matter of Ipstar Australia Pty Ltd v APS Satellite Pty Ltd  NSWCA 15. The decision provides some valuable insights into the standard of conduct required by businesses to avoid the unconscionable conduct provisions of the ACL.
Thomson Geer successfully acted for APS Satellite Pty Ltd (APS) (formerly known as SkyMesh) in a proceeding it brought against IPSTAR Australia Pty Ltd (IPSTAR), a wholesale supplier of broadband equipment and satellite bandwidth services. IPSTAR is a wholly owned subsidiary of Thai telecommunications company, Thaicom Public Company Ltd.
The First Instance Decision
On 22 December 2016 the New South Wales Supreme Court gave judgment for APS in its claim against IPSTAR concerning the quality of broadband equipment and its pricing of broadband services purchased by APS for on sale to end users located principally in remote and regional Australia.
Facts of the case
After entering into a supply contract with IPSTAR and installing equipment across rural and regional Australia in 2007, APS was inundated with customer complaints about faulty equipment and an inability to obtain a reliable internet connection. The complaints included, but were not limited to, claims the outdoor units were not adequately sealed against water ingress and that the modems would frequently “drop out”, “freeze” or “hang”, resulting in the equipment failing to access the IPSTAR satellite system.
By early 2010, IPSTAR was aware there were at least some defects with its equipment and advised all wholesale customers it would accept liability.
APS incurred substantial cost as it funded the necessary service calls and replacement of faulty hardware with new, often similarly faulty, IPSTAR equipment. At the time, APS advised IPSTAR of these problems and its intention to seek indemnification through a contractual warranty, or alternatively statutory warranty pursuant to the ACL (and previously TPA).
IPSTAR made the claim recovery process a difficult one for APS and notwithstanding considerable efforts on the part of APS, rejected all of APS’s claims and refused indemnification.
Whilst the parties remained in dispute about the warranty issue, the contract for IPSTAR’s continued supply of broadband data fell due for renewal. Without explanation, IPSTAR sought to raise its charge for broadband services significantly and offered APS a new contract initially at 20% above its previous supply cost, whilst at the same time leaving the cost to APS’s direct competitors at the same level.
Unbeknown to APS, IPSTAR had calculated the full cost of fulfilling its hardware statutory warranty commitments to APS and was attempting to recoup that (unexpended) cost of doing business on to APS by increasing their bandwidth pricing.
Ultimately, APS was able to negotiate a marginally lower price increase, but was effectively left with no choice but to accept the much higher supply costs being imposed upon it than its competitors (also supplied by IPSTAR) given the prohibitive costs of changing to an alternative supplier. The context in which APS was left with no choice but to accept the higher costs imposed by IPSTAR also included the continuing denial of warranty claims for defective products on the basis that the claims had not been sufficiently established.
APS proceeded to lodge a claim in the New South Wales Supreme Court for recovery of losses associated with approximately 4,000 claims in relation to IPSTAR equipment that were said to lack merchantable quality and fitness for purpose, pursuant to ss. 74B, 74D, 74H and 74K of the TPA and the equivalent provisions of the ACL, being ss.54, 55, 259, 271, 274 and 276.
In addition, the claim alleged unconscionable conduct pursuant to ss. 21 and 22 of the ACL (s.51AC of the TPA) in relation to the pricing of bandwidth services.
On 22 December 2016, His Honour Justice Rein held, amongst other things, that:
- The satellite dishes and modems supplied by IPSTAR were not of an acceptable quality and not fit for the purpose for which they were supplied. IPSTAR was ordered to pay the sum of $1,837,792 in connection with those claims, together with pre-judgment interest in the sum of $779,602.08 and costs; and
- IPSTAR acted unconscionably in raising its price for the future supply of broadband services to recoup losses it anticipated in fulfilling its previous statutory warranty obligations. IPSTAR was ordered to pay the sum of $3,482,367 in connection with that claim, together with pre-judgment interest of $856,074.49 and costs.
IPSTAR unsuccessfully appealed both of the above aspects of the decision at first instance.
On 14 February 2018 the New South Wales Court of Appeal dismissed IPSTAR’s appeal with costs and clarified what courts will take into consideration when determining a claim of unconscionable conduct. It also stepped away from previous courts’ attempts to use alternative terms and tests to explain what the term “unconscionable” actually means.
The Court of Appeal held that IPSTAR had acted unconscionably because it resolved to impose a price increase on APS that had been calculated by reference to its exposure to statutory warranty claims in circumstances where it had rejected claims it knew were valid and was refusing to consider claims it was obliged to assess.
As Leeming JA summarised (at 272):
“On Ipstar’s case, it had calculated a price increase based on a liability to pay claims, while at the same time refusing to pay any of them.”
Implications of the Decision in Considering Unconscionable Conduct
As part of its consideration of the meaning of the term ‘unconscionable conduct’, the Court of Appeal reviewed previous judicial attempts to explain its meaning, including re-characterisations such as “doing what should not be done in good conscience”, requirements for a “high level of moral obloquy”, “moral tainting” and “conduct against good conscience by reference to the norms of society that is in question”.
Bathurst CJ (with whom Beazley and Leeming JJA agreed) preferred as a starting point the need to understand what were acceptable community values, standards and norms prevalent in society (as was adopted in Lux Distributors Pty Ltd  FCAFC 90 and Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525) and then simply asking the question:
“has there been such a departure from those accepted community standards to objectively be seen as against good conscience?” (at 195)
Bathurst CJ explained (at 196):
“it involves a consideration of all the circumstances to conclude whether or not the conduct in question falls below acceptable norms, standards or values such as to warrant it being determined to be unconscionable.”
To determine the community standard against which the impugned conduct is to be assessed, the Court of Appeal confirmed the following considerations ought to be taken into account:
- The terms and factors set out in section 22 of the ACL;
- The approach taken by courts in cases involving the unwritten law of unconscionability;
- Judgments in other common law areas that involve a “want of good faith”;
- That good faith means “compliance with honest standards of conduct”; and
- All the circumstances of the surrounding transaction, including:
- The communications between the parties;
- Market conditions the parties are operating under; and
- The matters which in fact are motivating both parties.
Implications of the Decision for Business
- Even though manufacturers and suppliers are required to carry the burden of indemnifying consumers under the ACL, it is not unconscionable in and of itself for a party to set a price that recoups the costs of all of its accrued liabilities, even those under a previous contract;
- Parties are entitled to take advantage of their commercial position and obtain as high a price as they can negotiate in their contract negotiations;
- It will be unconscionable to conduct your business outside acceptable community norms, standards or values. For example, it will be unconscionable to impose a higher price for a service that seeks to recoup accrued or anticipated liabilities that you have refused to pay despite accepting that at least some of those defective claims are payable, within the broader circumstances where you are treating other customers differently and there is no viable alternative for the party to obtain like services from an alternative supplier.
For further information, please contact:
Rob Norton | Lawyer | +61 3 9641 8908 | firstname.lastname@example.org