UNCONSCIONABLE CONDUCT IN BUSINESS-TO-BUSINESS DEALING

The recent Federal Court declarations in legal proceedings, instituted by the ACCC against Coles Supermarkets Australia Pty Ltd (Coles), that it had engaged in unconscionable conduct, has application to the automotive industry and, in particular, during warranty audits.

The Federal Court declarations have been described by the ACCC Chairman as a very significant outcome for the business community in general, as it is one of the first findings of unconscionable conduct in a business-to-business context under the Australian Consumer Laws (ACL).

The unconscionable conduct provisions are found in Section 21 of the ACL and read:

(1) A person must not, in trade or commerce,

in connection with:
(a) The supply or possible supply of goods or services to a person (other than a listed public company); or
(b) The acquisition or possible acquisition of goods or services from a person (other than a listed public company);

Engage in conduct that is, in all the circumstances, unconscionable.

Warranty audits can sometimes be conducted in a manner that is unfair and/or unconscionable. For example, Dealers are sometimes asked to repay to the distributor or OEM payments made to the Dealer for warranty work because the warranty work does not conform to the ‘International Warranty Manual’. However, if the ‘International Warranty Manual’ does not conform to the Australian Consumer Laws then it is unfair to penalise the Dealer, who still has to perform the service or repairs under statutory warranty (consumer guarantees).

Often, technical non-compliances such as a failure to keep paperwork or failure to follow a correct process also result in the distributor requesting a rebate of the warranty payment made for that particular claim. The distributor then ‘extrapolates’ the technical non-compliance to determine a total amount to be repaid.

Perhaps being repaid for a technical non-compliance is fair, but what if you are new to the brand or if no adequate training or resources are provided that set out how to comply? Does it remain fair to penalise the Dealer? On occasion I have even heard of Dealers having to pay back more than they received for the warranty claim, due to changes in the cost of parts or currency fluctuations. The Dealers pay the price for the part at the time of the rebate, not at the time the part was supplied.

A court will typically now determine the issue of unconscionability by reference to the norms and standards of society. If normal, accepted and acceptable community and business values are not met in commercial dealings then a claim for unconscionable conduct might be possible under section 21 of the ACL.

Some of the warranty audit issues are similar to the unconscionable conduct of Coles. Coles would pursue its suppliers for a variety of payments, including for profit gaps, waste and fines for short or late deliveries, despite such profit gaps/fines not being part of the negotiated terms and conditions. Coles would also demand responses from suppliers in an unreasonable timeframe. The Court declared the conduct as unconscionable in circumstances where Coles had greater bargaining power.

In the Coles legal proceedings, the judge stated:

“Coles’ misconduct was serious, deliberate and repeated. Coles misused its bargaining power. Coles treated its suppliers in a manner not consistent with acceptable business and social standards which apply to commercial dealings. Coles demanded payments from suppliers to which it was not entitled by threatening harm to the suppliers that did not comply with the demand. Coles withheld money from suppliers it had no right to withhold”.

Unconscionable conduct claims are difficult to succeed with, but it is pleasing from a small business perspective to learn of outcomes such as those achieved in the Coles proceedings. It is also notable that the recent publication on Australia’s competition and consumer laws, known as the Harper Report, confirmed that there were sound social and economic reasons for enforcing a minimum standard of fair dealing within the law, and that enforcing business-to-business unconscionable conduct was an important function of the ACCC.

Vinesh George
Company Secretary and Legal Counsel, AADA

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