In Australian Securities and Investments Commission v Kobelt a majority of the High Court rejected the proposition that Mr Kobelt’s provision of book-up credit to a remote Indigenous community was unconscionable conduct in connection with financial services, pursuant to section 12CB of the Australian Securities and Investments Commission Act 2001 (ASIC Act).
Mr Kobelt operated a general store in Mintabie, South Australia. He sold goods including food, groceries, fuel and second-hand cars. Almost all of his customers were Anangu persons who resided in two remote communities in the Anangu Pitjantjatjara Yankunytjatjara Lands (APY Lands).
Mr Kobelt provided credit to Anangu customers by way of an informal system known as ‘book-up’. Under the book-up system the customer was required to give Mr Kobelt the debit card linked to the bank account into which their wages or Centrelink payments were paid and to disclose the personal identification number (PIN) for the card. Mr Kobelt withdrew the whole or nearly whole amount from the customer’s account and deposited those funds into his own account. Half of the amount he withdrew was applied in reduction of the customer’s debt. In order to gain access to the remaining funds, the customer had to return to Mr Kobelt’s store to purchase goods and to access cash or to obtain a ‘purchase order’ for another store—for a fee.
ASIC argued that the system operated by Mr Kobelt ‘would be patently unacceptable conduct elsewhere in modern Australian society’.
At first instance, the Federal Court found that the book-up system was unconscionable. White J listed eight specific reasons for that finding—in particular, that Mr Kobelt’s conduct tied those customers involved in the book-up system to the general store. Whilst he appeared to accept that the tie was one of a customer’s own making and was voluntarily entered into, his Honour said that this was to be considered in the context of two important matters. First, the tying effect of Mr Kobelt’s conduct was to his commercial advantage, constituted a form of exploitation of the Anangu customers and may account for the profitability of the general store. Secondly, Mr Kobelt’s conduct resulted in ‘the prolonged maintenance of his customers in a situation of dependence and consequent vulnerability’.
In making this finding White J stated:
I am conscious that the Court should not impose a view of what is appropriate for the Anangu which could be regarded as paternalistic, that is to say, imposing its own view of what is in their best interests. The freedom of action of the Anangu as citizens of Australia and their entitlement to make decisions in their own interests is to be respected.
The Full Court of the Federal Court overturned White J’s decision on appeal and ASIC appealed to the High Court, where the majority upheld the Full Court’s decision.
Kiefel CJ and Bell J based their decision that Mr Kobelt’s conduct was not unconscionable on an ‘absence of unconscientious advantage’ obtained by Mr Kobelt from the supply of credit to his Anangu customers under the book-up system. They did not accept ASIC’s case that the Anangu customers suffered from a special disadvantage such as to render them incapable of judging what was in their own interests. They considered that, based on anthropological evidence which had been presented to White J, the book-up system had advantages for Anangu customers 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).
In a separate judgment, Keane J held that Mr Kobelt had not exploited his customers’ socio-economic vulnerability in order to extract financial advantage from them. Nor did Mr Kobelt victimise the customers for his pecuniary advantage. Keane J considered the argument that there was an inequality of bargaining power was overstated—ultimately the customers could inflict significant harm on Mr Kobelt’s business if they chose to unite against him.
Gageler J noted that Mr Kobelt did not act systematically in bad faith, and that he was willing to negotiate with customers if they needed money. 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. He found that the Anangu customers had voluntarily entered into the book-up agreements, and chose to continue them. They were not precluded from making that choice by reason of vulnerability.
Minority decisions—unconscionable conduct
Three judges—Nettle and Gordon JJ and Edelman J (in a separate decision)—dissented and found that Mr Kobelt’s system was unconscionable.
Nettle and Gordon JJ noted the tension between the voluntariness of the customers’ entry into the transactions and perceived advantages of the system on the one hand; and their vulnerability and the conduct of Mr Kobelt on the other. They argued:
… conduct can be unconscionable even where the innocent party is a willing participant; the question is how that willingness or intention was produced … 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.
According to Edelman J, Mr Kobelt gives his customers Hobson’s choice—no matter how badly they need credit, they can either ‘choose’ that system or ‘choose’ no credit at all.
One commentator called the book-up system repugnant stating:
The logic of so-called “free choice” wielded by the majority has barely advanced from the 150-year-old arguments of slave owners. Surely it isn’t that difficult to recognise that a voluntary selection made by people who literally know of no other option and wouldn’t be allowed if they did, is no choice at all.
… that this case ended this way is utterly crushing because the rationale underpinning it is so, so wrong.
The Consumer Action Organisation called for changes to the law on the grounds that ‘the fact that there is such division as to the meaning of unconscionable conduct tells us the law is not working to support fair trading’. Financial Counselling Australia also called for law reform.
ASIC has signalled that it will continue to work collaboratively on book-up law reform and to educate book-up providers and consumers on fair and legal ways in which book-up can be provided.
Gageler J acknowledged:
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 … it is unsatisfactory but unsurprising to me that the Court should find itself closely divided on the resolution of the appeal.
Given the specific circumstances of the case, it seems the decision provides an insight into the evaluative process but does not offer precise guidance to practitioners on what will be, or will not be, unconscionable in every case.