No answer: the High Court considers statutory unconscionable conduct
Australian Securities and Investments Commission v Kobelt  HCA 18
Lindsay Kobelt ran Nobby’s General Store in Mintabie, a remote community carved out from the Aṉangu Pitjantjatjara Yankunytjatjara Lands in South Australia. Mr Kobelt provided a form of credit, known as “book-up”, to some of his customers. Almost all those customers were indigenous people from the APY lands with limited literacy and numeracy. At least half relied on Centrelink payments. In most cases, credit was provided to fund the purchase of a second hand car from Mr Kobelt.
Customers would give their bank card and PIN to Mr Kobelt. He would withdraw money in increments until there was nothing left in the account, and deposit the funds into his own account. 50% of the money was applied towards the debt. At his sole discretion, Mr Kobelt allowed the customer to use the remaining 50% on purchases at his store, or at other stores in Mintabie on payment of a fee. Transactions were not reliably documented (if they were documented at all) — at trial, two expert accountants could not make sense of his records. However, there was no evidence that Mr Kobelt was dishonest or had deliberately misappropriated any funds.
Over two years, Mr Kobelt withdraw a total of almost $1 million from 85 different customers. If customers left the APY lands, Mr Kobelt allowed them to have their card on the condition they return it to him when they came back.
The question for the Court was whether Mr Kobelt had engaged in in a course of conduct that breached s12CB of the Australian Securities and Investments Commission Act 2001 (Cth), which relevantly provides that:
(1) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of financial services to a person (other than a listed public company); or
(b) the acquisition or possible acquisition of financial services from a person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
(4) It is the intention of the Parliament that:
(a) this section is not limited by the unwritten law of the States and Territories relating to unconscionable conduct; […]
A sharply divided Court held 4:3 that he had not. The Court was split on the test for statutory unconscionability and, it seems, deeper questions about how notions of unconscionability interact with agency and paternalism, whether vulnerable consumers can (or should be allowed to) consent to exploitative arrangements, and how mainstream Australian culture interacts with indigenous cultures and norms.
In the majority, Kiefel CJ and Bell J held that Mr Kobelt’s conduct was not unconscionable because the system had benefits for the Anangu customers, and Mr Kobelt had not obtained any advantage that was against conscience. Justice Keane agreed, emphasising that there was no exploitation by Mr Kobelt, and Gageler J considered that the Anangu customers had voluntarily entered into the agreements.
In dissent, Nettle and Gordon JJ considered that six factors rendered Mr Kobelt’s system unconscionable, including the power imbalance between the parties, the lack of transparency, and that Mr Kobelt controlled what his customers could spend their money on. Justice Edelman agreed, adding further reasons. His Honour pointed to seven factors including the very high, and concealed, effective interest rates and that Mr Kobelt discriminated between indigenous and non-indigenous customers.
A lower bar for statutory unconscionable conduct?
The prohibition under s 12CB is expressly not limited by the “unwritten law”. But the Court had a range of views about what the standard under s 12CB actually is.
Chief Justice Kiefel and Bell J did not address the issue. They considered that the appeal did not “provide the occasion” to consider whether a special disadvantage and unconscientious taking advantage was still required () and did not consider whether there was a lower bar under s 12CB than under the common law. Justice Keane emphasised that the choice of the word “unconscionable” confirmed that “the moral obloquy involved in the exploitation or victimisation that is characteristic of unconscionable conduct is also required” under s 12CB: , footnote omitted.
Justice Gageler, Nettle and Gordon JJ and Edelman J held that statutory unconscionability was not limited by the equitable doctrine, although with different emphases. Justice Gageler held that unconscionable conduct “need not be found only in a fact-pattern” of exploiting a special disadvantage, though emphasised that this did not “dilute the gravity of […] unconscionable conduct so as to produce a form of equity-lite”: .
The dissenters took a broader view. Justices Nettle and Gordon held that statutory unconscionability was “more broad-ranging than that of the unwritten law” () and that special disadvantage of an individual was “not a necessary component of the prohibition”: . Edelman J observed that although he had previously observed that the moral baseline of unconscionability would emerge in the long run, “[u]nfortunately, ‘[i]n the long run we are all dead”: . His Honour held that there was “a clear legislative intention that the bar over which conduct will be unconscionable must be lower than that developed in equity”: .
In a side note symptomatic of the diverging opinions of the Court, Gageler J expressly disavowed his earlier use of the term “moral obloquy” in Paciocco v Australia & New Zealand Banking Group Ltd (2016) 258 CLR 525 at 587 . His Honour described it as “arcane terminology” and declared “I regret having mentioned it”: . Justices Nettle and Gordon, in dissent, regarded the term as unhelpful and noted that “[s]uch descriptors are better seen as emphatic expressions of conclusion rather than expressions of applicable standards”: . Yet Keane J enthusiastically adopted the term, citing the precise passage that Gageler J disavowed: .
Paternalism and agency
Beyond the important, but somewhat dry, question of the test for statutory unconscionable conduct, the Court revealed a deep tension between the majority and dissenters of a more philosophical kind.
At trial, there was anthropological evidence that interviewees had a basic understanding of how a “book-up” system worked, that “book-up” systems were consistent with Anangu cultural preferences, and that the system could help customers avoid “boom and bust” spending habits and “humbugging” (being asked for money by other members of the community).
The majority framed the issue as one of personal autonomy. Although acknowledging that similar “book-up” arrangements were not found in mainstream Australian society, Kiefel CJ and Bell J held that it was accepted by Anangu customers because “it reflected aspects of Anangu culture that are not found in mainstream Australian society” (), and that it was a “large submission” to suggest that voluntary arrangements that suited them were nevertheless against their interests: . Similarly, Keane J held that Mr Kobelt was simply responding to a “highly unusual market” () and Gageler J held there was insufficient evidence for the Court to “question the choice” made by those customers: . In other words, the majority considered that declaring the system unconscionable would override the agency of Anangu customers and, perhaps, amount to an imposition of Western values.
By contrast, the dissenting judgments suggested that that the effect of this approach was to use the vulnerability of the weaker party to excuse their exploitation. Justice Edelman described the system as appalling, saying that the Anangu customers were faced with a “Hobson’s choice”: “‘choose’ [Mr Kobelt’s] system, or “choose” no credit at all”: . Justices Nettle and Gordon held that “conduct can be unconscionable even where the innocent party is a willing participant; the question is how that willingness or intention was produced”:  (emphasis in original).
For the dissenters, Mr Kobelt’s system would have been utterly unacceptable anywhere else in Australia. The fact that the Anangu customers had no real option but to accept it, and did so, could not make that unacceptable system acceptable. As Nettle and Gordon JJ put it:
[I]n what other circumstances would a small-scale consumer credit provider require, let alone expect, a borrower’s assent to terms that, as security for relatively modest advances, the borrower hand over the right to receive the whole of the borrower’s meagre monthly income, with not less than half of it to be applied in reduction of the loan; the borrower confer on the credit provider an untrammelled discretion as to how much, if any, of the other half should be made available to the borrower for the purchase of life’s necessities; and the borrower be tied to purchasing all such necessities from the credit provider at the credit provider’s prices, or else pay the credit provider for the privilege of a “purchase order”?
[…] It is no answer to say that the customers were Anangu people. It is no answer to say that the customers agreed.
The Court remains split on whether the bar for unconscionability under statute is lower than under traditional equitable doctrine. The strong dissents provide a clear pathway to a broader understanding of statutory unconscionability, but it remains to be seen whether the law will develop down that path. In the meantime, any litigation based on statutory unconscionability will remain fraught, both under the ASIC Act and under the equivalent s 21 of the Australian Consumer Law. In addition, the majority judgments may open the way for defendants to resist allegations of unconscionability on the basis that the weaker party made a “voluntary choice”, even where that “choice” was a direct result of their vulnerability.
One might be tempted by the suggestion made by President Maxwell in his 2019 Law Oration: that the statutory prohibition on unconscionable conduct be abandoned altogether and replaced with a new regime carrying less historical baggage. Time will tell if Parliament rises to that challenge.