Summary:
The importance of organisational oversight by Australian directors and officers in the context of unconscionable conduct.
The concept of unconscionable conduct:
Unconscionable conduct is a common law concept encoded in the Australian Consumer Law, which is part of the Commonwealth Competition and Consumer Act 2010.
The Australian Consumer Law protects consumers from unfair practices in commercial dealings.
Sections 20 and 21 of the Law prohibit unconscionable conduct in trade or commerce.
This can potentially apply to;
misleading or deceptive conduct,
commercial bullying,
pressure tactics,
exploitation of vulnerabilities and unfair contractual terms,
and systemic dishonesty.
Regulators are increasingly vigilant in policing corporate dealings involving unconscionable conduct.
Real-life scenario:
In the recent High Court case involving an educational institution, the High Court unanimously found in favour of the ACCC. The ACCC was successful at the first instance and on appeal in proving that Productivity Partners engaged in systemic, unconscionable conduct.
Importantly, key individuals and the parent entity were held responsible for the unconscionable conduct. One Executive was held liable as a knowingly ‘concerned’ accessory. This meant the Executive was aware of and participated in conduct that exploited vulnerable consumers.
The Executive’s knowledge could be attributed to Productivity Partners’ parent company, and that company was also knowingly concerned in the legislative breach.
This landmark decision has implications not only for consumer law but, more broadly, concerning managerial or directorial responsibility. For example:
It is clear that conduct outside societal norms of acceptable commercial behaviour can contravene the Australian Consumer Law.
Given the fast-paced changes about what is considered ‘normal’ and the important role that ‘social justice’ plays in society today, the High Court’s decision is a reminder to directors and officers to maintain ethical standards and proper oversight of company policies and procedures and to ensure they’re being upheld and updated. Even an increase in the risk of misconduct (reasonably foreseeable at the time of the conduct) can be considered in determining whether conduct is unconscionable without the need for intention.
Additionally, accessorial liability can be attached if the defendant knows objective facts. They do not need to have knowledge of the ‘evaluative facts’ such as the character, quality, nature or status of those facts or that the conduct might be unconscionable.
Similar provisions to the Australian Consumer Law apply under s12CB of the Commonwealth Australian Securities and Investments Commission Act 2001.
The law has now been clarified with respect to both the ACCC and ASIC, potentially enabling more cross-collaboration between the two regulators. This increases the risks for directors and officers to be implicated in a regulatory proceeding or a related claim.
Businesses have also availed themselves of the Australian Consumer Law provisions. One classic illustration was an organisation that was involved in litigation, in which the seller sued their own directors on their own portfolio company board. It remains to be seen whether such legal proceedings will become more or less common in light of the above developments.
Importance of well-considered company policies and procedures:
The High Court found that corporations think and behave through their systems, policies and procedures.
So, if these ‘governance charters’ fall short in any actual or alleged way:
there can be an assumption that this was a known, condoned and deliberate strategy by the directors and officers and managers; and
a director, officer or manager who knows all the facts, is sufficient for a finding of unconscionability against the company, and the office holders could themselves be subject to a finding of unconscionability.
The implication is that this will only be assumed if the conduct is exceptionally egregious e.g. in this case the parent entity and a C-Suite executive engaged in the predatory behaviour.
This landmark decision is a sobering reminder in a currently challenged and pressured economic environment that directors, officers and managers need to maintain ethical standards as well as proper oversight of their organisation’s policies and procedures and ensure they’re being followed.
D&O Insurance perspective:
Regardless, the costs of defences for regulatory proceedings can be crippling to a company's balance sheet. Even companies without traditional products can be implicated in a corporate governance breach. Additionally, the company must indemnify its directors and officers for regulatory proceedings or claims against them personally.
Each Management Liability (ML) or D&O policy has its own terms and conditions around the degree to which such costs are insured or reimbursable to the company.
Additionally, unconscionable conduct is usually awarded equitable remedies that centre around injunctions, specific performance, rescission, rectification, prevention of unjust enrichment and equitable estoppel. These remedies can be excluded from many ML and D&O policies.
Please contact us to learn more and find out how your ML or D&O policy compares in light of the above considerations.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication.
