Unfair contracts: Driving a Hard Bargain or Unlawful Conduct?
Making great deals is key to running a successful business.
In most cases, the law holds people to their bargains. This means businesses can generally assume that they get what they contracted for.
But there’s an exception. If you engage in “unfair contracting” or “unconscionable conduct”, your contract might not be enforceable. You might also have to pay damages if a court claim is brought against you for things such as misleading or deceptive conduct.
A concern for business owners and other dealmakers is - when can a contract, as negotiated, be found to be unfair?
In part 1 of our Contract Series, we examine: just how far can you push a hard bargain?
Consider the following points that are relevant to business dealings.
1. Careful you’re not the playground bully
If you’re a key market player with a good reputation, you might feel you can get away with a bit more. But be conscious of the influence you’re wielding.
Take the example of Woolworths’ court case last year. There was a lot of bad press after secret dealings were made public that Woolworths had made requests to 800 suppliers to cover a $60 million gap in target and actual profit.
Though most suppliers refused to pay, some did. The question was whether Woolworths had abused their apparently stronger bargaining position to force suppliers into paying more than they were required to under existing arrangements.
The Federal Court found that Woolworths hadn’t abused its market power – that is, it hadn’t engaged in “unconscionable conduct”, which is banned under the Australian Consumer Law.
The evidence showed that suppliers had negotiated with Woolworths and made commercial arrangements to make profit. Importantly, and interestingly given reports of Woolworths’ dominant market position, the Court wasn’t convinced that Woolworths had a much stronger bargaining power than its suppliers.
But compare this to another case involving Coles. The Federal Court found that when Coles had made demands of its suppliers, it had abused its market power. In particular, Coles had threatened to withhold money from its suppliers.
This amounted to threats that were contrary to acceptable business standards in commercial dealings. Coles was ordered to pay $10 million in fines to the government, and pay back the $12 million it had drawn from suppliers.
2. Careful about mixing business with pleasure
When you’re making a deal with a friend or with family, arguably, you need to be even more careful than you might be when you’re dealing with someone purely on business terms.
A recent case heard by the NSW Court of Appeal involving Adrian and his father Vincent is an interesting example.
In 2004, Adrian and his wife Justine bought a property for $1.5 million. Almost $1 million of this was paid by Vincent.
In 2014, Adrian and Justine’s marriage broke down. Vincent then demanded that Adrian pay him $1.2 million. Adrian refused – saying his dad had gifted him the $1 million. Vincent denied that – he had loaned the money.
Vincent relied upon letters and other documents made at the time of the purchase of the property, showing that he wanted to quarantine the money from Justine, should the marriage with Adrian break down.
The court delved deep into the correspondence between the parties in 2004. They found it was clear, beyond doubt, that Vincent, Adrian and Justine all understood that the money provided by Vincent was a loan, repayable on demand and secured by a mortgage. The court rejected Justine had been forced into the contract.
The case came down to whether the transaction in its own terms was unfair (and void because of the Contracts Review Act). Justine was a homemaker and mother, so was in comparative economic disadvantage compared to Adrian.
The trial judge found that in those circumstances, the contract was unfair because the mortgage by Adrian deprived Justine of a right to Adrian’s share of the property without anything in return for giving up this right.
The Court of Appeal disagreed. They found that Vincent had made an advance of $1.2 million and in return Justine had acquired a 12.5% interest in the property. She had joint liability to a Westpac mortgage, but she was otherwise not exposed to personal liability to repay monies used to buy the property.
There was nothing unjust – the contract was simply Vincent, Adrian and Justine’s bargain.
3. Careful about stretching the truth
Who hasn’t made a little white-lie before? But careful about these – they could end up being a huge liability.
For example, see the ACCC’s recent claim against a former education provider. Get Qualified Australia (GQA) sent sales representatives who had telemarketing experience out into the public to enrol students into their courses. These students were told:
signing up to these contracts was “risk free”;
there was a “100% money back guarantee”;
spaces were “limited” and running out fast; and
there were limited time discounts.
All of these statements turned out to be lies or strategies placing undue pressure on students.
We’ve all seen these kinds of words before. But the central legal question in this case was whether GQA’s conduct was unconscionable – that is, against acceptable business standards and tactics.
The court found that GQA had induced its students into entering into contracts with them based on the lie of a 100% money back guarantee, which did not in fact exist. That is, the students would not have entered into the contract had that guarantee not been marketed to them.
The consumer agreements were found to be void. Further, the consumer agreements actually entered into, with a restricted refund policy, were found to be unfair. The main director of GQA was hit with an $8 million penalty, $500,000 of which he needed to pay within 30 days of the judgment.
All of these findings also support the conclusion that GQA engaged in misleading or deceptive conduct, which can also give rise to a similar outcome.
Be conscious of the kind of market you’re in and your relative bargaining power.
Negotiate and don’t make threats.
In business, a contract that you bully someone into signing, or a deal you force them into, may not hold up in court.
A contract can be unfair because of how it’s entered into – as well as unfair in its own terms.
There’s a difference between good marketing and misleading/deceiving a person into entering into a contract.
In the Commercial Disputes team at Bartier Perry, we deal with disputes where clients have pushed bargains too far – and cases where our clients have been on the receiving end too.
If you’re concerned about your deal and would like advice, contact one of our experienced lawyers who can help you navigate what is a difficult and ‘grey’ area in the law.
In part 2 of our Contract Series we will examine some instances when a business can avoid their obligations under a contract.
Author: Stephen Ke