A majority of the High Court has dismissed an appeal from the Full Court of the Federal Court of Australia, rejecting the proposition that the respondent’s provision of “book-up” credit to a remote Indigenous community was unconscionable conduct in connection with financial services pursuant to s12CB(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act‘).
The “book-up” credit system
The respondent, Mr Kobelt, operated a general store in Mintabie, South Australia, called “Nobby’s Mintabie General Store”. The store sold second-hand cars, food, groceries and fuel. From 2008 onwards, Mr Kobelt supplied a form of credit to customers who were predominantly Indigenous Aṉangu people, most of whom lived in two remote communities, Mimili and Indulkana, within the Aṉangu Pitjantjatjara Yankunytjatjara Lands (‘APY Lands’). The customers were poor and had low levels of literacy and numeracy.
The credit system was called a “book-up” system. Payment for goods was deferred in whole or in part, subject to the customer supplying Mr Kobelt with the keycard and the PIN linked to the bank account into which the customer’s wages or Centrelink payments were credited. Very few transactions were documented carefully or at all. Mr Kobelt had no way of knowing what the balance of the customer’s account was. On the days when the customer had told him moneys were coming in, he would withdraw money in increments until there were no funds left. He usually retained possession of the keycard until the debt was repaid. However, if the customer left APY lands, they were temporarily allowed to take their keycard on the condition that they would return it when they returned to APY lands. Most of the “book-up” credit was supplied in relation to the purchase of second-hand cars. Because the balance of their accounts was immediately removed when it came into the account, the customers could not buy groceries, but Mr Kobelt would let customers use a portion of what he had withdrawn during that particular pay period (up to 50%) to purchase groceries. Customers were therefore tied to using his store or other stores in Mintabie.
The trial judge had found that Mr Kobelt contravened s 29(1) of the National Consumer Credit Protection Act 2009 (Cth) (in that he did not hold a licence permitting him to engage in “credit activity”), and that his course of conduct was unconscionable contrary to s 12CB(1) of the ASIC Act. That provision provided:
“(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.
(3) For the purpose of determining whether a person has contravened subsection (1):
(a) the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and
(b) the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section.
(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; and
(b) this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and
(c) in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of:
(i) the terms of the contract; and
(ii) the manner in which and the extent to which the contract is carried out;
and is not limited to consideration of the circumstances relating to formation of the contract.”
The Full Federal Court upheld the finding in relation to the National Consumer Credit Protection Act 2009 (Cth), but unanimously held that Mr Kobelt did not engage in unconscionable conduct pursuant to the ASIC Act. A majority of the High Court upheld the Full Federal Court’s decision (Kiefel CJ and Bell J, Keane J and Gageler J). Three judges dissented (Nettle and Gordon J and Edelman J).
The majority decisions: Mr Kobelt’s conduct was not unconscionable because it carried advantages for the Aṉangu people and they voluntarily entered into the transaction
Kiefel CJ and Bell J said at  that there was an “absence of unconscientious advantage obtained by Mr Kobelt from the supply of credit to his Anangu customers under his book-up system.” They said said that the Aṉangu people were not suffering from a special disadvantage such as to render them incapable of judging what was in their own interests. The “book-up” system had advantages for Aṉangu people unrelated to their lack of education and financial acumen (including the capacity to deal with a bust and boom economy, to avoid paperwork, and to avoid the “demand sharing” or “humbugging” of economic resources by relatives which is characteristic of many indigenous societies) ( – ). Moreover, at  they said, “The difficulty with ASIC’s system case of statutory unconscionability lies in identifying any advantage that Mr Kobelt obtained from the supply of book-up credit that can fairly be said to be against conscience.”
Gageler J said that unconscionable conduct was that outside ordinary norms of societal conduct, and backed away from his endorsement of “moral obloquy” in a previous case at  – :
In Paciocco v Australia & New Zealand Banking Group Ltd, I referred to unconscionable conduct within the meaning of s 12CB as requiring “a ‘high level of moral obloquy’ on the part of the person said to have acted unconscionably”. “Moral obloquy” is arcane terminology. Without unpacking what a high level of moral obloquy means in a contemporary context, using that arcane terminology does nothing to elucidate the normative standard embedded in the section. The terminology also has the potential to be misleading to the extent that it might be taken to suggest a requirement for conscious wrongdoing. My adoption of it has been criticised judicially and academically. The criticism is justified. I regret having mentioned it.
What I meant to convey by the reference was that conduct proscribed by the section as unconscionable is conduct that is so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience. To that view of the statutory standard I adhere.
He said that the considerations pointed both ways. Factors which suggested the “book-up” system was unconscionable included Mr Kobelt’s strength of bargaining power, that Aṉangu customers were treated differently to non-Aṉangu customers, that there were other means by which he could have provided credit to customers, that there was no need to withdraw almost all of the customers’ funds, the charge on Aṉangu customers was very high compared to the lending rate for commercial loans and that this was not disclosed ( – ). Factors which suggested that the “book-up” system was not unconscionable included a lack of any undue influence on the customers, Mr Kobelt did not act systematically in bad faith, and that he was willing to negotiate with customers if they needed money (). It was pivotal that customers could end their relationship with Mr Kobelt by cancelling cards, ceasing to return a card after travel from the APY lands, or ceasing to deposit money in the account, and Mr Kobelt did not pursue them ( – ). Accordingly, the Aṉangu people had voluntarily entered into the “book-up” agreements, and chose to continue them, and were not precluded from making that choice by reason of vulnerability ().
Keane J agreed with the judgment of Kiefel CJ and Bell J. He said at  that ASIC “did not establish that the respondent exploited his customers’ socio-economic vulnerability in order to extract financial advantage from them.” He used the term “moral obloquy” at , despite Gageler J’s concerns about the term. It was important to his Honour that Mr Kobelt did not victimise the customers for his pecuniary advantage or that the customers could have gotten a better deal from elsewhere, either for loans or for second-hand cars. The inequality of bargaining power point was overstated because the customers could inflict significant harm on Mr Kobelt’s business if they chose to unite against him ([128 – 129]).
Implicit in all three majority judgments was the notion that it is paternalistic to say that Aṉangu customers are not capable of voluntarily entering into transactions. Explicitly, the judgments emphasised that such transactions may in fact be beneficial to Aṉangu customers because of their particular culture and remote situation.
The minority decisions: Mr Kobelt’s conduct was unconscionable because he took advantage of the Aṉangu customers’ special disadvantage and the system was discriminatory and unfair
Nettle and Gordon JJ and Edelman J wrote detailed, strongly worded dissents.
Nettle and Gordon JJ discussed the “unwritten law” with respect to unconscionability, including the necessity to show special disadvantage, and the difficulty in defining the term ( – ). They then go on to list and discuss the non-exhaustive list of factors set out in s 12CC of the ASIC Act which may indicated unconscionable conduct at  – , including:
“(a) the relative strengths of the bargaining positions of the supplier and the service recipient; and
(b) whether, as a result of conduct engaged in by the supplier, the service recipient was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and
(c) whether the service recipient was able to understand any documents relating to the supply or possible supply of the financial services; and
(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the service recipient or a person acting on behalf of the service recipient by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the financial services; and
(e) the amount for which, and the circumstances under which, the service recipient could have acquired identical or equivalent financial services from a person other than the supplier; and
(f) the extent to which the supplier’s conduct towards the service recipient was consistent with the supplier’s conduct in similar transactions between the supplier and other like service recipients; and
(i) the extent to which the supplier unreasonably failed to disclose to the service recipient:
(i) any intended conduct of the supplier that might affect the interests of the service recipient; and
(ii) any risks to the service recipient arising from the supplier’s intended conduct (being risks that the supplier should have foreseen would not be apparent to the service recipient); and
(j) if there is a contract between the supplier and the service recipient for the supply of the financial services:
(i) the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the service recipient; and
(ii) the terms and conditions of the contract; and
(iii) the conduct of the supplier and the service recipient in complying with the terms and conditions of the contract; and
(iv) any conduct that the supplier or the service recipient engaged in, in connection with their commercial relationship, after they entered into the contract; and
(k) without limiting paragraph (j), whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the service recipient for the supply of the financial services; and
(l) the extent to which the supplier and the service recipient acted in good faith.”
They noted at  –  that the heart of the dispute concerns voluntariness and whether the transaction is voluntary. Importantly for their analysis, at  they said:
It is important to appreciate, therefore, that considerations of voluntariness need to be assessed in the context of the system of conduct in issue. Conduct can be unconscionable even where the innocent party is a willing participant; the question is how that willingness or intention was produced. An innocent party may be capable of making an independent or rational judgment about an advantage in an otherwise bad bargain. However, an advantage, and the capacity of the innocent party to identify that advantage and make a rational choice, cannot operate to transform what is, in all the circumstances, an exploitative arrangement. Nor can the existence of that advantage absolve from liability the stronger party who unconscientiously takes advantage of the weaker party.
As a matter of fact, it was found that Mr Kobelt had taken advantage of the Aṉangu customers by taking all their money, had failed to take accurate or adequate records, that the effective rate of interest was very high and that the system tied customers to Mr Kobelt’s store ( – ). Nettle and Gordon JJ were very skeptical about the advantages to Aṉangu customers of the “book-up” system, and said that it was speculative to say that Aṉangu customers used the system to avoid “demand sharing” ( – ). Moreover they were skeptical that there was no other better, fairer system ( – ).
Nettle and Gordon JJ said that the Aṉangu customers were clearly labouring under vulnerability or special disadvantage because they lived in remote communities, they were poor, uneducated, and lacked financial literacy. Their distinctive attitude to their key cards and PINs rendered them vulnerable ( – ).
They said there were six relevant factors which rendered Mr Kobelt’s system an unconscionable taking of advantage of the customers’ vulnerability:
- The power imbalance between the parties: Mr Kobelt held all the power in the relationship and the Aṉangu customers were limited in their opportunities to find credit elsewhere.
- The lack of transparency and understanding of the transactions: because the transactions were non-transparent, the Aṉangu customers could not hold Mr Kobelt to account, and there was no understanding of the terms and conditions of the agreement.
- The implementation of the system was characterised by unconscionable conduct: including the fact that all money was taken out deliberately before the customer could access it, and that Mr Kobelt controlled when and upon what the customer could spend his or her money on, and the lack of transparency.
- Tying: The system tied the Aṉangu customers to Mr Kobelt’s store and created a prolonged dependence. Moreover, the fact that book-up customers had to pay substantially more than a customer with cash was unconscionable.
- Values, norms and practices: The fact that Mr Kobelt was not alone in entering into the “book up system” or that he was entitled to make a profit did not entitle him to exploit his customers.
- Mr Kobelt’s conduct was not necessary to protect his legitimate interests pursuant to s 12CC(1)(b) of the ASIC Act: there were other alternatives which were less unfair which could have protected his legitimate interests.
Nettle and Gordon JJ’s strongest statement comes at  –  where they note that such a system would not be acceptable in other areas of Australia and in relation to other groups of people who were not Indigenous:
As Wigney J recognised in the Full Court, the terms, nature and circumstances of Mr Kobelt’s book-up system bespoke unconscionability and “[m]any, if not most, members of the broader Australian community would probably find some aspects of the system to be surprising, if not extraordinary”. That understates the position. Putting to one side that the majority of Mr Kobelt’s customers were financially illiterate Anangu living in a remote, harsh and impoverished part of northern South Australia, in 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”?
Where else and with what other customer would it be regarded as acceptable that the terms of the arrangement go entirely undocumented; that the credit provider not be required to, and not, render invoices, receipts or reconciliations; and that the credit provider not maintain financial accounts sufficient even for two experienced accountants, who gave evidence at trial, to determine how much had been advanced and how much had been paid? Surely, anywhere else with any other customer, such an arrangement would be regarded as unconscionable. It is no answer to say that the customers were Anangu people. It is no answer to say that the customers agreed.
Consequently, they would have declared the “book-up” system to be unconscionable.
Edelman J also dissented. His views of the case are evident from his opening paragraph at  when he said that the Aṉangu customers were offered “Hobson’s choice – no matter how badly they need credit, they can either “choose” that system or “choose” no credit at all.”
He agreed with Nettle and Gordon JJ, but added further reasons. He discussed the history of unconscionability in the unwritten law ( – ), and the fact that the statutory history of the relevant provisions indicated a desire on the part of Parliament to extend the section beyond that definition ( – ).
One learns from Edelman J that several of the Aṉangu customers bought several second-hand cars in a very short period after the previous cars broke down, and did not have the most basic understanding of what their bank statements meant or what the key cards signified ( – ). He acknowledged that other customers found that the system had advantages for them (). However, on balance he found that the system was unconscionable for seven reasons (listed from  – ):
- The extreme difference in bargaining power between Mr Kobelt and the Aṉangu customers, including the fact that the Aṉangu customers were impoverished, innumerate and illiterate.
- The imposition of terms were not reasonably necessary for the protection of his business interests pursuant to s 12CC(1)(b) of the ASIC Act, given that there were other less onerous systems.
- The interest rates were concealed in the price differentials for the cars purchased on credit rather than cash, and there was such a lack of transparency that even someone with high literacy and numeracy could not calculate the interest.
- The interest rates effectively charged were very high and could be up to 43% over one year for a car purchased for $4000.
- Mr Kobelt discriminated between his customers. The “book-up” system was mostly only applied to Aboriginal customers, and no other form of credit was available to Aboriginal customers, even though other forms of credit were available for non-Aboriginal customers.
- Mr Kobelt did not disclose the risk that he might make unauthorised withdrawals on the account (as he did at one point).
- The system tied the Aṉangu customers to Mr Kobelt’s store and Mr Kobelt restricted the amount of money they could use and what they could spend it upon.
Taken together, Edelman J considered that this rendered the system unconscionable. He noted that he took a “broad” view of unconscionability as including notions of reasonableness, but even if a “narrow” view were taken, the system would still be unconscionable ( – ).
The difference in approach between the majority and the minority appears to come down to a difference of opinion in values, which flows through to the way in which they judge the voluntariness of the transactions. It may be difficult to apply in future cases. Gageler J commented at  that it was difficult to judge an intersection between the cultures of the Aṉangu people and wider Australian society. He continued at  that he had considered declining special leave to appeal for this reason, and concluded:
Hard cases test and sometimes strain legal principle. They do not always lend themselves to elucidation of legal principle in a way that can be predicted to provide precedential guidance of the systemic usefulness generally to be expected from a decision of an ultimate court of appeal. Special leave to appeal having been granted, it is unsatisfactory but unsurprising to me that the Court should find itself closely divided on the resolution of the appeal.
|High Court Judgment|| HCA 55||12 June 2019|
|High Court Documents||ASIC v Kobelt|
|Full Court Hearing|| HCATrans 252||4 December 2018|
|Special Leave Hearing|| HCATrans 153||17 August 2018|
|Appeal to FCAFC|| FCAFC 18||15 February 2018|
|| FCA 1327||9 November 2016|