Unconscionable conduct
121 The ACCC contends that the Harrison Companies engaged in a system of conduct or pattern of behaviour in relation to customers whose contracts were transferred which was unconscionable in all the circumstances, in contravention of s 21 of the Australian Consumer Law. In particular, the ACCC contends that the customer contracts were not validly transferred from one Harrison Company to another because the contracts were transferred without the knowledge or consent of the customers. In these circumstances, the 'transferee' company had no right to demand payment of moneys from the customer, including early termination fees. This is because, the ACCC contends, the 'transferee' company was not in a contractual relationship with the customer. Indeed, it was the 'transferor' company that had terminated the contract early, by going out of business. The ACCC also contends that the Harrison Companies contravened the TCP Code in transferring the customer contracts without giving proper notice to, and seeking consent from, the customers; and that the Harrison Companies' conduct involved deception in that they disguised the fact that the transfers had taken place and did not make clear to customers that they had a choice whether or not to contract with the new company.
122 A threshold issue to be determined is whether the transfers were valid and effective to transfer the customer contracts to the 'transferee' company. The respondents contend that the transfers were effective on the basis of an implied novation, in that, having become aware of the transfers the customers paid monthly fees to the new company and can thereby be taken to have agreed to a novation of the contract such that the 'transferee' company was substituted for the 'transferor' company. The respondents rely on the discussion of implied novation by Nettle JA (as his Honour then was), with whom Neave and Dodds-Streeton JJA agreed, in McMahon v National Foods Milk Ltd (2009) 25 VR 251 at [77]. The respondents' contention is premised on the factual proposition that notifications of the transfers were sent to customers. However, I have found, at [88] above, that the Harrison Companies did not send notifications of the transfers to customers. In light of this finding, the implied novation contention is very difficult to sustain. It is likely that most customers were not aware of the change of company and thus cannot be taken to have agreed to the change. (Even in respect of the second transfer, where the trading name changed, many customers may not have appreciated that the company providing the services - as distinct from the trading name - had changed.) Further, even if a customer did notice that the company on an invoice was different, and then paid one or more monthly invoices, I doubt that this is sufficient to find an implied novation. I think it would need to be shown that the customer knew that it was proposed to transfer the customer's contract from one company to another and that the customer had a choice whether or not to agree to the transfer. Unless the customer had that knowledge, I do not think it is possible to imply a novation from the customer's conduct because the element of consent would be absent. It is not established as a general proposition that customers had such knowledge. In these circumstances, I reject the implied novation contention. It follows that I conclude that, apart from individual cases where there may be particular facts and circumstances, the customer contracts were not validly transferred from one Harrison Company to another.
123 It follows from this that, absent particular facts and circumstances, the 'transferee' company was not entitled to payment of moneys from the customers under the contracts. The 'transferee' company was not in a contractual relationship with the customer. If the customer sought to terminate his or her contract before the end of the term, the 'transferee' company had no entitlement to payment of an early termination fee under the contract.
124 Another issue is whether the transfers complied with the TCP Code. Chapter 7 of the Code, the relevant provisions of which have been set out at [39]-[44] above, deals with transfers of services from one Supplier to another (referred to as the Gaining Supplier). The general position under that chapter is that the Gaining Supplier must use reasonable endeavours to ensure that a consumer is only the subject of a transfer if the consumer has provided consent to the transfer (clause 7.2). An exception is provided in clause 7.11 for corporate reorganisations. In such circumstances, it is sufficient to notify the customer of certain specified matters before the transfer is initiated. The respondents submitted in closing submissions that the transfers constituted corporate reorganisations and fell within the exception. In my view, the definition of "corporate reorganisation" in the TCP Code is referring to a bona fide reorganisation within a group of companies. In the present case, I do not think the transfers were bona fide reorganisations. In each case, the transfer was prompted, at least in part, by actions taken by the TIO and ACMA, including the fact that the TIO had sued and obtained judgment against the company and ACMA had taken regulatory action for breaches of the TCP Code. Even in the case of the fourth transfer, the decision to transfer the assets to four companies rather than one, was merely the mechanism that was adopted not the reason for the transfer. Accordingly, I conclude that the transfers needed to comply with the general provisions of ch 7 of the TCP Code, including the requirement of clause 7.2 to use reasonable endeavours to ensure that a consumer is only the subject of a transfer if the consumer has provided their consent to the transfer. In the present case, customer consent was not sought in respect of any of the transfers.
125 Having dealt with those issues, I now turn to a consideration of whether or not the Harrison Companies engaged in unconscionable conduct in contravention of s 21, having regard to the matters referred to in s 22 of the Australian Consumer Law. In my view, the Harrison Companies engaged in a system of conduct or pattern of behaviour which was unconscionable in all the circumstances. The key elements of the system or pattern were: the transfer of customer contracts from one Harrison Company to another without the customer's consent; the failure to notify the customer of the transfer; save in relation to the second transfer, the adoption of the same trading name before and after the transfer; at least in the case of the third and fourth transfers, the sending of invoice documentation in substantially the same form before and after the transfer; and the 'transferee' company demanding payment of an early termination fee (or threatening to impose such a fee) if the customer wished to end a contract early. Additional elements in some cases were: the 'transferee' company threatening to refer the customer to a debt collection agency or lawyers if the customer did not pay the early termination fee; referral of the customer to a debt collection agency or lawyers if the fee was not paid; and the debt collection agency or lawyers threatening legal proceedings if the customer did not pay the early termination fee and additional charges. The evidence establishes that these elements were adopted systematically by the Harrison Companies during the relevant period. For the following reasons, in my view this conduct was unconscionable in all the circumstances. First, in general, there was an imbalance in the strength of the bargaining positions of the Harrison Companies and the customer (s 22(1)(a)). The customer was in many cases an individual who, it may be inferred, was not in a financial position to challenge the early termination fee that the Harrison Companies threatened to impose or demanded. Secondly, in the absence of a contractual term permitting the transfer, and in the absence of the customer's consent, the transfers were invalid and ineffective. Consequently, there was no legitimate basis for the 'transferee' company to demand an early termination fee (or threaten to impose such a fee). (Section 22(1)(j) sets out certain matters to which regard may be had "if there is a contract between the supplier and the customer". But here there was no contractual relationship between the 'transferee' company and the customer.) Thirdly, the process by which the Harrison Companies transferred the customer contracts from one company to another, at best, lacked transparency and, at worst, involved trickery and deception (s 22(1)(i)). At least in relation to the third and fourth transfers, it is hard to escape the inference that the Harrison Companies sought to disguise the transfers from customers: no notice was given; the trading name stayed the same; and the invoice documentation was substantially the same before and after the transfers. Even in the case of the first and second transfers, there was a lack of transparency regarding what had occurred and the options open to the customer. Fourthly, the Harrison Companies placed undue pressure on the customer to pay the early termination fee or 'remain' with the 'transferee' company (s 22(1)(d)). The pressure was "undue" because there was no legitimate basis to require the customer to pay the fee. The early termination fee was often a substantial amount of money. The demand for payment of the fee, or the threat to impose the fee, was likely to pressure some customers to 'remain' with the 'transferee' company. Where the Harrison Companies threatened to refer (or did refer) the matter to a debt collection agency or lawyers, this was likely to pressure the customer to 'remain' with the 'transferee' company or to pay the early termination fee. Similarly, in cases where the debt collection agency or lawyers (on behalf of the Harrison Companies) threatened legal proceedings unless the customer paid the early termination fee and additional charges, this was likely to pressure the customer to pay the amounts claimed. Fifthly, insofar as some customers may have acted on the reasonable belief that the Harrison Companies would comply with the TCP Code, the transfers did not comply with the Code (see s 22(1)(h)). Insofar as some of the matters referred to in s 22(1) have not been referred to, it does not appear that any support the respondents' position. Further, there do not appear to be other material matters which bear on whether or not the conduct was unconscionable.
126 The circumstances of this case may be contrasted with those involving the imposition of late payment and other fees on banking customers considered in Paciocco. In that case, Allsop CJ expressed his conclusions at [347] as follows:
In all the circumstances, in particular, the lack of any proven predation on the weak or poor, the lack of real vulnerability requiring protection, the lack of financial or personal compulsion or pressure to enter or maintain accounts, the clarity of disclosure, the lack of secrecy, trickery or dishonesty, and the ability of people to avoid the fees or terminate the accounts, I do not consider the conduct of ANZ to have been unconscionable. To do so would require the court to be a price regulator in banking business in connection with otherwise honestly carried on business in which high fees were extracted from customers.
127 In contrast, in the present case, there was a lack of transparency and a failure to seek consent in connection with the transfers, there was no legitimate basis to demand payment of an early termination fee from the customer, and pressure was applied to pay the early termination fee or 'remain' with the 'transferee' company. Taking the above matters into account, I consider the conduct of the Harrison Companies to have been, in all the circumstances, unconscionable. Putting the matter simply, it was against good conscience to demand payment of an early termination fee (or to threaten to charge such a fee) in circumstances where the company making the demand/threat had no contractual relationship with the customer and thus no entitlement to such a fee and, moreover, the company with which the customer had contracted had itself ended the contract by going out of business.
128 The conduct described above was engaged in, at least, by the 'transferor' and 'transferee' companies. I think it was also engaged in by the second respondent as this company sent out the invoices and collected all payments and was jointly controlled and operated with the other Harrison Companies.
129 In describing the system of conduct or pattern of behaviour, I have included as an element the threat to impose, or the demand for payment of, an early termination fee. Where the 'transferee' company merely demanded payment of a monthly invoice for services rendered, I am not satisfied that the conduct was unconscionable. In such circumstances, the customer had received and enjoyed the benefit of the services for which payment was demanded.
130 The system of conduct or pattern of behaviour described above was applicable in relation to each of the six customers who gave evidence in the proceeding. On this basis, the conduct of the relevant Harrison Companies in relation to these customers was unconscionable in contravention of s 21 of the Australian Consumer Law. There are also additional facts and matters which support the conclusion that the conduct of the relevant Harrison Companies in relation to the six customers was unconscionable in all the circumstances. In particular, I note:
(a) In relation to Ms Adams: there was a significant imbalance in the strength of the bargaining positions of the parties in circumstances where (as the Harrison companies knew: see 94 above) Ms Adams was a pensioner; the SoleNet representative's statement, "You've broken your 24 months contract with us. Under your contract you are now liable to pay SoleNet early termination fees" (see 94 above) was false and misleading; the threat to refer Ms Adam to SoleNet's debt collector if she did not pay the early termination fee (see 94 above) involved placing pressure on her to pay a fee that was not due; the statement, "You've broken your contract and you have to pay early termination fees" (see 94 above) was false and misleading; the sending of the Collection Referral Notice for $859.90 involved placing pressure on Ms Adams to pay an amount that was not due; the SoleNet representative's statement that, "You owe this. You've broken your 24 month contract, and we'll pursue you if you don't pay" (see 94 above) was false and misleading and involved placing pressure on Ms Adams to pay an amount that was not due. I note for completeness that, although Ms Adams noticed the change in name from Sure Telecom to SoleNet, she was told, incorrectly, by a SoleNet representative that it was the same company and it had just changed its name (see 94 above); in these circumstances, she did not have the knowledge necessary for it to be inferred that she consented to a novation.
(b) In relation to Ms Bomford: there was a significant imbalance in the strength of the bargaining positions of the parties in circumstances where (as the Harrison companies knew: see 96 above) Ms Bomford was a pensioner; the statement by the SoleNet representative, "If you cancel your contract with us, you'll have to pay us $1,426.50 in early termination fees" (see 96 above) was false or misleading; the statement, "If you break your contract with us, you are liable to pay us early termination fees" (see 96 above) was false or misleading. Although there was a conversation (set out in 96 above) during which Ms Bomford agreed to enter into a contract with SoleNet, the context for this conversation was conversation set out in 96 above. Also, she was asked whether she wanted to "transfer back" to SoleNet, which did not accurately reflect the true situation, which was that she had never been in a contractual relationship with the Harrison Company trading as SoleNet. I note for completeness that, although Ms Bomford noticed the change in name from Sure Telecom to SoleNet, she was not told that a transfer of her contract from one Harrison Company to another was proposed or had taken place and that she had the opportunity to decide whether or not to continue the contract; in these circumstances, she did not have the knowledge necessary for it to be inferred that she consented to a novation.
(c) In relation to Ms Krepak: there was no legitimate basis for the demand by EC Legal that she pay cancellation fees of $1,027.34; the sending of this letter, which threatened legal action if she did not pay, placed pressure on Ms Krepak to pay an amount that was not due; the statement by Evelyn M at eCollect, "even though you cancelled to prevent a contract breech (sic) with your old provider, you have now in consequence, breeched (sic) a service agreement with SoleNet" (see 98 above) was false and misleading; the statement, "Since you're now in breech (sic) of the 24 month agreement, you are required to pay for the remaining months" (see 98 above) was false and misleading; there was no legitimate basis for the Harrison Companies to impose a charge of $737.00 on Ms Krepak for termination of the contract, or to increase that amount to $856.12 for failing to make that payment, or to increase the amount to $1,027.34 when her account was referred to debt recovery (see 98 above); the statement, "Be aware that the balance may only continue to increase, should you fail to make arrangements to finalize payment" (see 98 above) placed pressure on Ms Krepak to pay an amount that was not due.
(d) In relation to Mr Clements: the SoleNet letter dated 16 July 2015 proceeded on the basis that the company sending that letter had a contractual relationship with Mr Clements; by this time the transfer from the fifth to the sixth respondent had taken place and Mr Clements did not have a contractual relationship with the sixth respondent; the statement in that letter, "We have referred you to a national, third party collection agency and a 20% fee will be added in accordance with SoleNet's Schedule of Fees, and we reserves (sic) the right to collect further" placed pressure on Mr Clements to pay an amount that was not due; the letter from EC Legal claiming $1,463.81, and threatening legal action if the amount was not paid, placed pressure on Mr Clements to pay an amount that was not due. I note that, in the case of Mr Clements, the respondents argue that the obligation to pay an early termination fee crystallised before the transfer in June 2015 from the fifth respondent to the sixth respondent, and in these circumstances the debt was capable of assignment without Mr Clements's consent. I do not accept that argument. There was no legal assignment of any such debt (as no notice of assignment was given to Mr Clements). Moreover, the letter from SoleNet dated 16 July 2015 proceeded on the basis that the company sending that letter itself had a contract with Mr Clements, and not on the basis that it had taken an assignment of a debt and was merely collecting that debt. In these circumstances, I do not think the evidence supports the contention that there had been an assignment of the debt and that the sixth respondent was merely collecting that debt. In any event, there was no disclosure or transparency in the Harrison Companies' dealings with Mr Clements about any assignment of a debt.
(e) In relation to Mr Phillips: there was no legitimate basis for the eleventh respondent to demand, in the Collection Referral Notice dated 24 August 2015, payment of the amount of $737.00; the sending of the Collection Referral Notice, which stated that SoleNet had referred Mr Phillips to SoleNet's collection agency and a 20% fee would be added and SoleNet reserved the right to collect further legal costs, placed pressure on Mr Phillips to pay an amount which was not due; he paid the amount of $737.00 in that context; there was no legitimate basis for the demand by EC Legal on behalf of the Harrison Companies that Mr Phillips pay $955.90. If and to the extent that the respondents make a similar argument in relation to Mr Phillips as in relation to Mr Clements (namely that the obligation to pay an early termination fee crystallised before the relevant transfer and in these circumstances the debt was capable of assignment without consent), for the same reasons, I do not accept that argument.
(f) In relation to the O'Neills: the sixth respondent purported to enter into a contract with Mrs O'Neill in circumstances where the existing phone account was not in her name and she had no authority to transfer the account; the sixth respondent transferred its business including the contract to the eighth, ninth, tenth and eleventh respondents without notifying the O'Neills or seeking their consent; the O'Neills made clear in the 14 August 2015 email that they wanted to terminate any contract immediately and that it should not have been offered to Mrs O'Neill in the first place; when Mr O'Neill called SoleNet on 25 August 2015, he was told by the SoleNet representative that Mrs O'Neill had entered into a two-year contract with SoleNet and that the Welcome Pack stated the minimum cost to exit the contract (see 104 above); those statements were misleading because any contract was with the sixth respondent not the 'transferee' company; the statements by the SoleNet complaints team in the email dated 25 August 2015 that SoleNet had complied with all the necessary procedures and that if the O'Neills wanted to "transfer" to their preferred provider they would have to pay 80% of the Early Termination Fee were false or misleading; in the context of what had gone before, this was tantamount to a threat to charge 80% of the early termination fee (a substantial amount) if the O'Neills decided to transfer to Telstra; this placed pressure on them to 'remain' with the 'transferee' company.
131 For these reasons, I conclude that the Harrison Companies engaged in unconscionable conduct in contravention of s 21 of the Australian Consumer Law.