Facts
In some rural and remote Australian communities residents of some Aboriginal communities have entered into credit arrangements with storekeepers known as “book-up”. Typically, this requires the customer to provide the storekeeper with his/her debit card linked to a bank account into which wages or Centrelink payments are deposited and the personal identification number (PIN) to that card. Under this arrangement the storekeeper will withdraw funds from the account to both reduce the customer’s debt and supply goods to the customer between “pay days” ([1]). Mr Kobelt operated a general store in Mintabie, South Australia in an area excised from the APY Lands about 1,100km from Adelaide. The majority of his customers were Anangu persons who lived in remote communities north-west of Mintabie in poverty and who had low literacy and numeracy ([20]). Mr Kobelt operated a book-up system by which he held Anangu customers’ keycards and PINs. He would withdraw the entire amount in the account (and in some instances amounts in excess of that) and use roughly 50% to pay the customer’s debt to his general store and in connection with the purchase of second hand vehicles and the remainder for the future supply of goods and services. The Anangu customers could end the book-up credit contract by cancelling their keycard or arranging for their wage or Centrelink payment to be made to a different account. It was an “unsophisticated” system and there was very little in the way of record keeping. Mr Kobelt also sold a significant number of second hand vehicles ([21]-[31], [130]-[131], [163]ff, [272]-[278]).
There was anthropological evidence that Anangu customers “have adapted their values and practices to accommodate those of the market economy through the personalisation of financial transactions, that is, Anangu customers prefer to conduct financial transactions through the use of brokers, such as storekeepers” ([32]). Motor vehicles had become key to social, ceremonial and cultural life in Aboriginal communities in APY Lands and for some the book-up arrangement was the only way in which they could purchase a vehicle ([34]). The judges differed in their views as to whether, in the context of Anangu culture and practices, the anthropological evidence supported the argument that the book-up credit had the following advantages: ameliorating the “boom and bust cycle” and mitigating against the obligations imposed by “humbugging” or “demand sharing” (Kiefel CJ and Bell J at [35]-[37] thought it did cf Nettle and Gordon at [163]ff, specifically [211]-[218], and Edelman J at [266], [269]-[278] who thought it did not).
Procedural Background
At first instance in the Federal Court ASIC brought proceedings against Mr Kobelt for contravening s29(1) of the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act), which prohibits engaging in “credit activity” without a licence. ASIC also pursued a claim against Mr Kobelt for contravening s12CB of the ASIC Act ([7]). Justice White held that Mr Kobelt had contravened s29 of the NCCP Act and that the conduct in supplying credit under the book-up system was unconscionable. Mr Kobelt was ordered to pay a pecuniary penalty to the Commonwealth of $100,000 ([10], [131]-[132]).
On appeal, the Full Federal Court (Besanko, Gilmour and Wigney JJ) allowed the appeal in part, finding that Mr Kobelt’s conduct was not unconscionable ([11]-[12], [46], [135]-[136]).
The only issue on appeal to the High Court was whether Mr Kobelt’s conduct was unconscionable within the meaning of s12CB of the ASIC Act ([137]).
Grounds of Appeal
The three grounds of appeal were ([55]-[57], [137]):
- “The Full Court failed to give “due weight” to the special disadvantage or vulnerability of Mr Kobelt’s Anangu customers and gave “undue or disproportionate weight” to the customers’ basic understanding of the book-up system, voluntary entry into the book-up contracts, ability to terminate the contracts (albeit by acting in breach of them), and “agency” or freedom of contract.
- The Full Court erred in overturning the primary judge’s findings that Mr Kobelt engaged in predation or exploitation; in failing to give “any or due weight” to evidence of Mr Kobelt’s “irregular conduct’ which, while not part of the “system”, was indicative of predation and exploitation; and in giving “undue or disproportionate weight” to the finding that Mr Kobelt acted “with ‘a degree of good faith’ and not dishonestly or fraudulently”.
- The Full Court gave “undue or disproportionate weight” to the incidental benefits or advantages of the book-up system arising from historical and cultural norms and practices of the Anangu community, and did not attach “any or due weight” to the primary judge’s findings that these historical and cultural norms and practices contributed to or demonstrated the special disadvantage of some of Mr Kobelt’s customers.”
ASIC alleged that the Full Court erred in law by failing to distinguish between the principles of undue influence and those of unconscionability under the general law ([56]).
Meaning of “unconscionable” in s12CB of the ASIC Act
While the Court was split in its application of s12CB of the ASIC Act to the facts of this case, their Honours were in general agreement that the meaning of the term “unconscionable” is drawn from the equitable concept and understood in light of the factors listed in s12CC. The Court held:
• The term “unconscionable” is not defined in the ASIC Act and it bears its ordinary meaning as conduct that is objectively against conscience, or subject to a “high level of moral obloquoy” ([14], [118]).
“For a court to pronounce conduct unconscionable is for the court to denounce that conduct as offensive to a conscience informed by a sense of what is right and proper according to values which can be recognised by the court to prevail within contemporary Australian society” ([93] per Gageler J).
• The meaning of “unconscionable” in s12CB is informed by, but not limited to, the scope of the equitable doctrine. In equity conduct is unconscionable where a stronger party to a transaction exploits or takes advantage of a special disadvantage in a weaker party impairing the weaker party’s ability to form a judgment about his or her best interests ([81], [117]-[123], [144]ff, [279], [295]). Justice Gageler noted that parliament’s use of equitable terminology does not authorise a court “to dilute the gravity of the equitable conception of unconscionable conduct so as to produce a form of equity-lite” ([90]).
• The standard of conscience under s12CB is informed by the following values referred to in Paciocco v Australia and New Zealand Banking Group Ltd: certainty in commercial transactions, honesty, the absence of trickery or sharp practice, fairness when dealing with customers, the faithful performance of bargains and promises freely made, and “the protection of those whose vulnerability as to the protection of their own interests places them in a position that calls for a just legal system to respond to their protection, especially from those who would victimise, predate or take advantage” ([14]).
• To make a finding of unconscionable conduct involves an evaluative judgment ([47]). In evaluating whether there has been a breach of s12CB the Court must look to the factors in s12CC of the ASIC Act ([83], [154]).
• The existence of dishonesty or other “moral taint” is a material consideration in determining whether the conduct is objectively unconscionable, but the absence of dishonesty is not determinative ([59], [257]).
• The presence (or lack) of undue influence is just one of the factors that can be considered under s12CC of the ASIC Act ([89]). Chief Justice Kiefel and Bell J remark that “[t]he absence of the exertion of undue influence, pressure or unfair tactics bears on the assessment of whether the commercial advantage obtained by the supplier in connection with the supply of the financial service is an unconcientious advantage” ([58] – emphasis in original). Justices Nettle and Gordon held that the focus for s12CB of the ASIC Act must be on the conduct of the stronger party, in contrast to equitable doctrines of unconscionable conduct and undue influence which focus on the characteristics of the “victim” ([232]-[233]).
Whether Mr Kobelt’s conduct was unconscionable
The majority (Kiefel CJ, Bell, Gageler and Keane JJ) held that in all the circumstances (including having regard to applicable cultural norms and practices) Mr Kobelt’s conduct was not unconscionable, and that he did not contravene s12CB of the ASIC Act. The majority dismissed the appeal ([77], [79], [111]-[112], [113]-[115]). Justice Gageler considered that there were factors that pointed both ways but ultimately, His Honour concluded that the conduct was not unconscionable ([94]-[101], [111]-[112]).
In dissent, Nettle and Gordon JJ and Edelman J (in a separate judgment) held Mr Kobelt’s conduct was unconscionable ([137], [156]ff, [230]-[265], [268], [296]-[313]).
Common to all of the Justices was the importance of whether Mr Kobelt took “unconscientious advantage” of his Anangu customers and whether the customers exercised “agency” but the majority reached a different conclusion on the facts to that of the dissenting justices. Chief Justice Kiefel and Bell J considered that Mr Kobelt did not obtain an unconscientious advantage over the Anangu customers by supplying credit to them ([19]). In opposition, Nettle and Gordon JJ found that Mr Kobelt had unconscientiously taken advantage of his customers’ vulnerability. Further, their Honours held there was: a power imbalance; a lack of transparency and accountability; the system tied the customers to his business creating a dependency; the terms, nature and circumstances of the system were unconscionable; and such a system was not reasonably necessary to protect Mr Kobelt’s interests ([205]-[207], [237]-[264]).
The majority concluded that the customers did exercise “agency” ([65], [104]-[108]). Chief Justice Kiefel and Bell J commented that “[i]t is a large submission that the provision of book-up credit on terms which suited Mr Kobelt’s adult Anangu customers and which enabled them to purchase a consumer good which they valued highly is to be characterised as objectively against their interests” ([65]). In similar terms, Gageler J considered “that the continuation of the relationship between Mr Kobelt and his Anangu customers was not the involuntary consequence of the operation of the book-up system but a matter of choice on the part of those customers…” [107].
In contrast, Nettle and Gordon JJ were of the view that the customers did not exercise agency: “It does not alleviate the unconscionability of Mr Kobelt's book-up system that his customers were so disadvantaged as to regard Mr Kobelt's offering as acceptable ([262]).”
Justice Edelman considered that: “Although for some, perhaps many, Mr Kobelt’s system of credit was better than no credit at all, nevertheless his Anangu customers, unlike other customers, were offered no other alternative. And the manner in which the system was implemented, which was pleaded as part of the system itself, was appalling” ([278]). Justice Edelman opined that the system of credit did not give customers a choice because they were not offered any alternative. Further, even if the customers had been able to choose, the manner of the offer and the process by which it was administered made the system unconscionable having regard to relevant factors under s12CC(1) ([302]-[313]). Justice Edelman concluded:
“As the Solicitor-General of the Commonwealth rightly said in oral submissions, in what is probably a significant understatement, the system of credit adopted by Mr Kobelt is one that would be unacceptable in mainstream Australian society. It is made less acceptable, not more acceptable, because it was the only form of credit offered, and thus accepted, in remote communities of highly vulnerable persons in need of credit” ([313]).
Read the decision on the High Court of Australia website. 
