NETTLE AND GORDON JJ. Mintabie is a community in the far north of South Australia, about 1,100 km north of Adelaide. It is in an area excised by lease to the Government of South Australia from the Anangu Pitjantjatjara Yankunytjatjara Lands ("the APY Lands"). Several Indigenous communities live in the APY Lands to the north or northwest of Mintabie. Two communities − Mimili and Indulkana − are located 165 km and 116 km by the main road from Mintabie respectively. There are no banks, credit unions or like institutions in or immediately adjacent to the APY Lands, meaning credit is not readily available to the residents of the APY Lands ("the Anangu").
From the mid-1980s until 2018, the respondent, Lindsay Kobelt, ran a general store at Mintabie under the name "Nobbys Mintabie General Store" ("Nobbys"), with the assistance of his partner, his son and some employees. Nobbys sold a range of goods including food, groceries, general goods, fuel and second‑hand cars. As part of his business, Mr Kobelt provided credit facilities to customers, including by way of an informal system called "book-up". The supply of cars and provision of book-up were closely linked: most of the book-up that was provided related to the sale of second‑hand cars and most customers bought their cars through book-up. The primary judge found that it was likely Mr Kobelt had begun offering book-up as a means of attracting and retaining customers as the population in Mintabie declined.
The appellant ("ASIC") brought proceedings in the Federal Court of Australia against Mr Kobelt alleging that his book-up system contravened s 29(1) of the National Consumer Credit Protection Act 2009 (Cth) ("the NCCP Act") and was unconscionable contrary to s 12CB(1) of the Australian Securities and Investments Commission Act 2001 (Cth) ("the ASIC Act").
ASIC was successful before the primary judge on both grounds. The primary judge held that, between 1 July 2011 and 31 October 2012 in respect of 92 customers, and continuing until at least April 2014, Mr Kobelt contravened s 29(1) of the NCCP Act by engaging in credit activity within the meaning of s 6(1) of the NCCP Act when selling cars by way of book‑up without holding a licence to engage in that credit activity.
The primary judge also held that Mr Kobelt contravened s 12CB(1) of the ASIC Act in that, since at least 1 June 2008 and continuing until at least July 2015, in connection with the supply of financial services to customers of Nobbys, Mr Kobelt engaged, in trade or commerce, in a system of conduct or pattern of behaviour within the meaning of s 12CB(4)(b) of the ASIC Act which was unconscionable within the meaning of s 12CB(1)(a) of the ASIC Act.
Mr Kobelt appealed to the Full Court of the Federal Court. It was common ground that Mr Kobelt did not hold a licence authorising him to engage in "credit activity" as defined in the NCCP Act. The Full Court, like the primary judge, found Mr Kobelt had contravened s 29(1) of the NCCP Act for conduct engaged in between 1 July 2011 and 31 October 2012.
However, the Full Court allowed Mr Kobelt's appeal in relation to s 12CB of the ASIC Act, holding that Mr Kobelt's book-up system was not unconscionable. Besanko and Gilmour JJ reasoned that, although Mr Kobelt's customers were vulnerable because they had "very limited or no net assets, had very limited net income", "had low levels of financial literacy" and lived in "remote and impoverished communities", Mr Kobelt's book-up system was not unconscionable because the customers "understood the book-up arrangements and voluntarily entered into them" and the customers knew they could bring the arrangements to an end and some did. Besanko and Gilmour JJ accepted that the effect of Mr Kobelt's conduct was to tie his customers to him, and that effect was advantageous to him, but said that there were also advantages to his customers. Wigney J considered that the primary judge's conclusion that Mr Kobelt's book-up system was unconscionable was infected by one or other of two errors: a failure to give sufficient weight to Anangu culture and practices; and having regard to, or giving excessive weight to, what his Honour described as "un‑pleaded or non-systems considerations".
On appeal to this Court, the sole issue was whether Mr Kobelt's book‑up system was unconscionable contrary to s 12CB of the ASIC Act. In all the circumstances, Mr Kobelt's book-up system was unconscionable.
The parties, at trial and on appeal both in the Full Court and in this Court, pointed to competing considerations which they submitted bore upon whether the system of conduct or pattern of behaviour Mr Kobelt engaged in was unconscionable. All of those considerations are relevant, but it will be convenient to group them under a number of different categories: vulnerability; taking advantage; and the effect of the arrangements.
Before turning to those considerations, it is necessary to begin with the ASIC Act.
Section 12CB of the ASIC Act
Division 2 of Pt 2 of the ASIC Act is concerned with unconscionable conduct and consumer protection in relation to financial services. Subdivision C of Div 2 contains two prohibitions. Section 12CA(1) prohibits a person, in trade or commerce, from engaging in conduct in relation to financial services if the conduct is "unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories". The prohibition in s 12CA does not apply to conduct that is prohibited by s 12CB.
Section 12CB(1) prohibits persons from engaging in conduct that "is, in all the circumstances, unconscionable" in connection with, relevantly, the supply of financial services in trade or commerce. Although s 12CB(1) was amended with effect from 1 January 2012, the amendments were not material to the issues in this appeal.
From 1 January 2012, s 12CB relevantly 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."
Section 12CB(4)(b) makes it clear that the prohibition can apply 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". A "system" connotes an internal method of working; a "pattern" connotes the external observation of events.
"Unconscionable" is not defined in the ASIC Act and s 12CB is "not limited by" the unwritten law of the States and Territories relating to unconscionable conduct. As will be explained, the non‑exhaustive list of factors set out in s 12CC necessarily implies that the statutory conception of unconscionability is more broad‑ranging than that of the unwritten law. Nevertheless, the unwritten law has a significant part to play in ascribing meaning to the term "unconscionable" under s 12CB(1).
Unwritten law
The equitable doctrine of unconscionable conduct "looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so". The "abiding rationale" of the doctrine is to "ensure that it is fair, just and reasonable for the stronger party to retain the benefit of the impugned transaction".
Relief under the doctrine of unconscionable conduct requires that the innocent party was subject to a special disadvantage in dealing with the other party when the transaction was entered into, "which seriously affect[ed] the ability of the innocent party to make a judgment as to [their] own best interests"; and that the other party unconscientiously took advantage of that special disadvantage. The existence of those circumstances at the time of the transaction is what "affect[s] the conscience" of the stronger party and renders the enforcement of the transaction, or the taking of the benefit, "unconscientious" or "unconscionable".
It is not possible to identify exhaustively what amounts to a special disadvantage. However, the essence of the relevant weakness is that it "seriously affects" the innocent party's ability to safeguard their own interests. Relevant matters may include, but are not limited to, "poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary"; as well as "illness, ignorance, inexperience, impaired faculties, financial need or other circumstances" that affect the innocent or weaker party's ability to protect their own interests. It is not sufficient that the matters give rise only to an inequality of bargaining power.
A party will have unconscientiously taken advantage of an innocent party when the former knew or ought to have known of the existence and effect of the special disadvantage; or, put another way, when the special disadvantage was sufficiently evident at the time of the transaction to make it unconscientious to procure or accept the assent of the innocent party.
Unconscionable conduct does not require a finding of dishonesty. However, it is not merely concerned with what is "fair" or "just". Unconscionable conduct can include the passive acceptance of a benefit in unconscionable circumstances. And unconscionable conduct can be found even where the innocent party is a willing participant, the question is how that willingness or intention to participate was produced.
As this Court has recognised and restated a number of times, invocation of equitable doctrines, including unconscionable conduct:
"calls for a precise examination of the particular facts, a scrutiny of the exact relations established between the parties and a consideration of the mental capacities, processes and idiosyncrasies of the [weaker party]. Such cases do not depend upon legal categories susceptible of clear definition and giving rise to definite issues of fact readily formulated which, when found, automatically determine the validity of the disposition. ... [']A court of equity takes a more comprehensive view, and looks to every connected circumstance that ought to influence its determination upon the real justice of the case'."
Here, the issue of special disadvantage must be considered as part of the broader question: whether Mr Kobelt's book-up system took advantage of an inability on the part of some of his customers to make worthwhile decisions in their own interests, which inability was sufficiently evident to Mr Kobelt, or should have been, to render his system exploitative.
It is sometimes said that unconscionable conduct entails "moral obloquy" or a "high level of moral obloquy". So to describe unconscionable conduct, however, reveals little of the requisite character of unconscionability. Such descriptors are better seen as emphatic expressions of conclusion rather than expressions of applicable standards.
The doctrine of unconscionability was recently criticised by the Court of Appeal of Singapore for its vagueness and generality. The Court applied a distinction between "broad" and "narrow" unconscionability in an effort to address this issue. The utility of such distinctions, however, is questionable. Certainly, in any given case, a conclusion as to what is, or is not, against conscience may be contestable: so much is inevitable given that the standard is based on a broad expression of values and norms. However, efforts to address the "indeterminacy" of the doctrine by way of further distillations, categorisations or definitions may risk "disappointment, ... a sense of futility, and ... the likelihood of error". This is because evaluating whether conduct is unconscionable "is not a process of deductive reasoning predicated upon the presence or absence of fixed elements or fixed rules". Instead, at least in the Australian statutory context, what is involved is an evaluation of business behaviour (conduct in trade or commerce) in light of the values and norms recognised by the statute. The problem of indeterminacy is addressed by close attention to the statute and the values derived from it, as well as from the unwritten law.
Non-exhaustive list of factors
Section 12CB(1) requires that the court have regard to "all the circumstances" in determining whether conduct is unconscionable. But the ASIC Act also gives "express guidance as to the norms and values that are relevant to inform the meaning of unconscionability and its practical application". That express guidance is found in the non‑exhaustive list of factors set out in s 12CC, which assists in setting a framework for the values that lie behind the notion of conscience identified in s 12CB. The factors relevantly include:
"(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."
No one factor (or select group of factors) is primary or determinative. It is, therefore, not appropriate to select particular factors upon which to focus. All the relevant factors must be taken into account.
Voluntariness
At the heart of this appeal is what is said to be a 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.
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.
To contend otherwise in this case is to use the limited choices available to Mr Kobelt's customers in relation to cars and credit to excuse a system which tied those customers to Nobbys and placed them in a position of dependence in relation to Mr Kobelt. Of course, to be able to purchase a car is better than to have no car; to have access to credit is preferable to having no access to credit. But these propositions say nothing about the terms on which the car and credit are provided.
Voluntariness must be judged against other relevant matters: the power imbalance between the parties; the relative lack of choice available to Mr Kobelt's customers; the fact that customers had a limited understanding of the terms of the arrangement; the lack of transparency of the terms and conditions of the arrangement; and, importantly, Mr Kobelt's exploitative conduct. Many of those matters arose from Mr Kobelt's particular conduct, rather than any particular characteristic of his customers. They arose because Mr Kobelt chose to set up his system of book‑up in the way that he did.
Contrary to the view of Wigney J in the Full Court, and notwithstanding that some customers expressed positive views about Nobbys, it is not paternalistic to assess the vulnerability of Mr Kobelt's customers and whether that vulnerability was exploited. It is not paternalistic to take into account that the view of a vulnerable party of a transaction will be shaped by context and circumstance. Equally, it is not paternalistic to look at the transaction and the position of the parties objectively. It is to do no more than engage with the criteria of unconscionability.
Moreover, so to conclude does not ignore that there are perceived to be cultural benefits of book-up generally, in that it can, in some circumstances, address "boom and bust" expenditure and "demand sharing" obligations. Because the focus of s 12CB(1) is on the conduct of the supplier of financial services, those cultural benefits, even if they were being addressed by Mr Kobelt's system, do not relieve a finding of unconscionability with respect to his particular system. Instead, s 12CB(1) requires the supplier to set up a system, a book-up system, that is not unconscionable. The contention that Mr Kobelt's book-up system is "better than nothing" is not good enough. Mr Kobelt's system could, and should, have been better. There were alternative ways to access those benefits without exploitation. Voluntariness of entry into the arrangements, and the perceived advantages of the system, do not prevent Mr Kobelt's conduct from being unconscionable.
Before considering the relevant factors in detail, it is necessary to say something more about the facts.
Facts
Mr Kobelt's book-up system
"Book-up" is a term used to describe various informal systems of credit available in many rural and regional towns around Australia. A form of book-up was available at least at one of the two other stores in Mintabie.
Mr Kobelt's book-up system provided credit facilities to customers of Nobbys. All but one of the customers to whom Mr Kobelt provided book-up were Indigenous. Book-up was the only means by which Mr Kobelt provided credit to his Anangu customers. Mr Kobelt also extended credit to non‑Indigenous customers but on different terms to the book-up facility. Specifically, he did not require non-Indigenous customers to provide security and he allowed them until the end of the week in which the credit was provided to pay his account, or sometimes until the end of the following week. At trial, 117 recipients of book-up services were identified as part of ASIC's case against Mr Kobelt under the ASIC Act. All 117 customers were Indigenous residents of the APY Lands. Between July 2011 and October 2012, Mr Kobelt sold 105 second-hand cars to 92 customers under the book-up system.
Vulnerability
The communities in which Mr Kobelt's customers lived were remote. The majority of his customers were impoverished. They had no or limited net assets, and only limited net income. While some had employment of some kind at some time, at least half were dependent on Centrelink benefits as their principal source of income. Less than half of the 117 customers were able to read and the reading ability of those who could read was compromised.
More than half of Mr Kobelt's customers could not "add up". The majority of the customers had low levels of financial literacy and lacked the competence of most Australians in the wider community to make informed decisions concerning the use of financial services. They lacked understanding of the basis upon which debit cards (known as "key cards") and personal identification numbers ("PINs") are issued and of the steps customers should take in their own self‑interest.
The 117 customers were vulnerable, with that vulnerability "arising from a combination of factors: the remoteness of their communities; the limitations on their education; their impoverishment; and the limitations on their financial literacy".
The Full Court referred to some countervailing considerations: in particular, voluntariness, the customers' knowledge and cultural matters.
It can be accepted that all 117 customers had "an understanding of the basic elements of the [b]ook-up system". They understood that they could purchase a vehicle or other goods from Nobbys on credit; that the credit arrangement involved them paying later for the vehicle or goods by providing Mr Kobelt with their key card and PIN and authorising him to use it to withdraw money from their bank account as it became available; and that the disadvantage arising from the customers not having access to money for the necessities of life could be addressed by Mr Kobelt advancing further credit.
The 117 customers had an awareness of the above aspects of the system at the time they entered into the book-up arrangement and chose voluntarily to do so. Entering into the arrangements was their choice. Each of the Anangu witnesses from whom evidence was led at trial consented to Mr Kobelt making withdrawals from their account using their key card and PIN.
Evidence at trial showed that many Indigenous people in remote communities spend improvidently, a pattern or cycle known as "boom and bust" expenditure. A boom and bust cycle mirrors the deposit of income, such as from employment or welfare payments, into bank accounts. Money is spent as it becomes available, without consideration of the medium- to long-term consequences of such expenditure. A significant number of Mr Kobelt's book-up customers were affected in this way. Evidence at trial also highlighted the practice of "demand sharing". This term refers to an Anangu social obligation requiring sharing of resources with specific categories of kin, under which the giver has a responsibility to share and the recipient the right to share. This cultural practice can give rise to bullying or exploitation. However, there was very little evidence that Mr Kobelt's customers chose to enter into the book-up system to avoid demand sharing.
Mr Kobelt's actions − taking advantage
When a customer approached Mr Kobelt for book-up, Mr Kobelt would require very little information from them. If he did not know them, he would ask their name and where they lived. He would ask all customers wishing to use his book-up system what income they received and the day on which it was paid into the account to which Mr Kobelt would be given access. He would make his assessment by reference to that information. He did not ask customers to complete any application form. He did not enquire whether they had any other debts, liabilities or commitments. He was indifferent as to whether his customers could afford the commitment they were undertaking, having regard to their financial position more generally. Until the end of 2010, the arrangements were wholly verbal. From January 2011, Mr Kobelt asked customers to provide a signed authority which stated only: "I [name of customer] give Lindsay permission to take money from my Key Card [number of card]". One hundred and fifty‑one customers gave permission in this way, although there were 21 instances where the authority was not signed by the customer, and two instances of customers signing without any authority written above.
To receive book-up, Mr Kobelt required that customers provide him with a key card linked to the bank account into which their income was paid, as well as their PIN. Mr Kobelt generally retained customers' key cards until their debt was paid in full. Mr Kobelt would put each key card in its own resealable plastic bag. He would stick a piece of masking tape to the outside of the bag on which he would write the customer's name, their PIN and, in most cases, details of when payments would be made into the account. Apart from writing on the masking tape (and, commencing in January 2011, obtaining a written authority), Mr Kobelt did not otherwise record in writing the terms and conditions on which he provided book-up.
Customers could frustrate the book-up arrangements by cancelling their key cards or having their income paid into a different account. From time to time, some customers did so. But while Mr Kobelt generally did not take enforcement action against these customers, he accepted that this was because it was not in his commercial or reputational interest to do so. The primary judge found that to frustrate the arrangements would require customers to "act in breach of their agreement with Mr Kobelt, that is, to act in a way which was dishonourable, if not dishonest".
Sale of second-hand cars
Most of Mr Kobelt's book-up related to the sale of second‑hand cars. The arrangements were generally as follows. Mr Kobelt and the customer would enter into a written contract for sale of the second‑hand car. The contracts were in the form prescribed by the Second-hand Vehicle Dealers Regulations 1995 (SA). None of the contracts in evidence referred to book-up or the fact that the sales were by credit.
In most cases, the cars had already been driven more than 200,000 km. This meant the statutory duty to repair defects under s 23 of the Second-hand Vehicle Dealers Act 1995 (SA) did not apply. Two Anangu witnesses gave evidence at trial that the second-hand vehicles sold by Mr Kobelt broke down within a relatively short period of time, requiring them to return to Nobbys and purchase another car from Mr Kobelt. This happened on more than one occasion. The primary judge observed that, on the road between Mimili and Indulkana, there were numerous cars on the side of the road, which appeared to be broken down, abandoned or derelict. Many of the vehicles seemed to be of the kind sold by Nobbys.
Mr Kobelt's method of pricing the vehicles was as follows. When Mr Kobelt offered a vehicle for sale, he attached to the vehicle the form containing the details required by statute, including the price at which the vehicle may be purchased ("the list price"). He calculated the list price by adding together the price he paid for the vehicle, any transport cost and the cost of any significant repair work, then doubling that sum. He then compared that figure to competitor prices for similar vehicles, and sometimes adjusted the figure so it was a little less than the competitor price.
Until at least April 2014, Mr Kobelt's practice was to sell vehicles at a reduced price for customers who could pay the purchase price in full in cash at the time of purchase, and the list price to those to whom he provided book-up. The primary judge rejected Mr Kobelt's evidence that he had not differentiated the price in this way for four years, taking the view that Mr Kobelt was seeking - contrary to other evidence before the Court - to establish falsely that the price differential practice had ceased several years earlier and finding, with respect to the submission that Mr Kobelt's oral evidence could be attributed to a faulty memory, that it was "implausible that this is a matter about which Mr Kobelt could have been honestly mistaken".
Nearly all of the 105 sales of vehicles using book-up were made to the Anangu and the prices ranged between $2,500 and $7,800. The average and median prices were $5,600 and $5,800 respectively. The price differential between cash and book‑up sales was usually at least $1,000 per vehicle and sometimes more. The price differential was a charge for the provision of credit. The primary judge considered that, in most cases, it was probable that the book‑up customers were not aware of this charge, let alone the amount of the charge.
Withdrawal conduct
Mr Kobelt or his son would generally withdraw the whole, or nearly the whole, of the funds available in a customer's account, usually on the day, or shortly afterwards, that the funds were paid in by the employer or Centrelink ("the Withdrawal Conduct"). Mr Kobelt or his son would often make the withdrawals very early in the day or between midnight and 1 am. They did this to prevent customers being able to access their funds by other means. Mr Kobelt and his son regarded themselves as being in "competition" with many of the customers as to who could make withdrawals first. Mr Kobelt's approach was to continue withdrawing amounts incrementally until the attempted withdrawal was unsuccessful due to insufficient funds.
Between 1 July 2010 and 30 November 2012, Mr Kobelt withdrew a total of just under $1 million ($984,147.90) from the accounts of 85 customers to whom he had provided book-up for the purchase of second-hand cars.
There was no objective justification for Mr Kobelt withdrawing, in most cases, all of the available funds in the customers' accounts. In some instances, he withdrew amounts which exceeded those which the customer had authorised - sometimes as a result of Mr Kobelt failing to realise a customer's debt had already been paid - and in other cases made withdrawals more frequently than had been authorised.
On 14 December 2010, there was a "glitch" in one of the Commonwealth Bank of Australia's systems ("the CBA glitch"), one consequence of which was that withdrawals and transfers from CBA debit accounts were approved, even though the withdrawals and transfers exceeded the available balance in the customers' accounts. Mr Kobelt took advantage of the CBA glitch to withdraw $56,944 from his customers' CBA accounts, even though he had no authority to do so (at least with respect to a significant proportion of that amount). As the primary judge found, Mr Kobelt must have appreciated at the time that this amount was much more than normal and could not have thought that his customers had authorised him to make these extra withdrawals. The CBA glitch resulted in overdrafts to some customers' accounts.
These extra withdrawals revealed that Mr Kobelt's attitude was to transfer to himself whatever funds were available in a customer's account at any one time.
Book-down
Without access to their key card or their funds, customers had no means of acquiring groceries and the other necessities of life. To address this, Mr Kobelt would supply goods to customers by way of further book-up (sometimes called "book-down").
Mr Kobelt allowed, at his discretion, customers to use some of the amount he had withdrawn and transferred into his own account to purchase groceries at Nobbys, to obtain cash, or to make a purchase at another community store in the APY Lands through a "purchase order" sent from Nobbys. He applied the balance towards the debt owed to him.
Mr Kobelt generally limited the credit allowed for book-down to 50 per cent of the amount he had most recently withdrawn.
The book-down arrangement was not recorded in writing and in most cases Mr Kobelt did not expressly agree with customers that they were "entitled" to 50 per cent: more often than not he told them only that they could have a "little bit" or only "some" groceries. And although customers were nominally "entitled" to that 50 per cent, Mr Kobelt would not generally allow them to access the whole amount, instead limiting access to $100, $150 or $200 at a time. The primary judge referred to Mr Kobelt's justification that he limited access to ensure that his customers would have "something" at the end of the week, but his Honour made no such finding.
Mr Kobelt did not maintain any record showing the balance available to each customer by reason of the 50 per cent he said would be available. Customers with a significant book-up debt were generally permitted to buy milk, bread and meat with book-down but not items like sweets and chips. In that way, Mr Kobelt controlled the expenditure of his book-up customers. As a result, with few exceptions, customers had to travel to Nobbys to access their money and acquire groceries.
Mr Kobelt sometimes allowed customers to use book‑down to purchase bus tickets to travel away from the APY Lands. He generally arranged these purchases because he had a 1300 number to Greyhound, the bus company.
If Mr Kobelt allowed a customer to make a cash advance, he applied either a small, fixed charge or, in some instances, a charge of 10 per cent of the amount of the cash advance.
If Mr Kobelt sent off a "purchase order" to another store, he charged $5 or $10. Through his "purchase order" system, Mr Kobelt would send a store in the APY Lands a purchase order which named the customer, the amount of credit authorised and often the nature of the authorised purchase - for example, "goods" or "cash". The recipient store would then allow the customer to purchase food or would issue cash in the amount stated. Mr Kobelt's fee of $5 or $10 for each purchase order was cheaper than the comparable express money order service provided by Australia Post. Several stores in the APY Lands did not agree to purchase order arrangements with Mr Kobelt.
Customers' access to bus tickets, cash advances and purchase orders was at Mr Kobelt's discretion. In some situations, Mr Kobelt's exercise of that discretion, and thus control, was arbitrary: for example, in one case Mr Kobelt allowed book-up for a customer to buy a bus ticket to Adelaide but, a short time later, he refused funds for the customer to buy a return ticket to the APY Lands because Mr Kobelt thought that the customer had had enough book-down.
Record keeping
Mr Kobelt made "inadequate and often illegible" records of the book-up transactions and Mr Kobelt had "little or no insight" into the importance of providing (or even being able to provide if requested) a true and proper account to his customers.
Mr Kobelt provided no written record of his withdrawals to customers. He kept printed EFTPOS records of withdrawals in the plastic bag containing the key card but discarded them once the bag became too full (usually after two or three months).
Until 2014, the records were kept in a rudimentary form of running account. The entries were handwritten, in abbreviated form, into unused diaries - although the entries bore no correlation to the dates printed in those diaries. The entries were made in a "cramped and somewhat chaotic manner" and often over printed portions of the diaries, making it difficult to understand the state of a customer's account at any given time. Further, Mr Kobelt did not record in the diaries the balance owed by the customer after each transaction but would calculate it from time to time. In 2014, Mr Kobelt commenced keeping his records in the form of ledger cards. Even then, it was unrealistic for customers to have understood, or checked the accuracy of, Mr Kobelt's records, had they wished to do so.
For customers who had not purchased a car but who used book-up for food and groceries only, Mr Kobelt did not keep records of the transactions in the diaries; he only kept printed EFTPOS records in the plastic bag containing the key card.
Fees and charges of the book-up system
The book-up system was said to be "fee free and interest free", except for the provision of credit in relation to the sale and purchase of second‑hand cars, purchase orders and cash advances.
For the purchase of second-hand cars, to which most of Mr Kobelt's book‑up related, the primary judge concluded that the credit provided by Mr Kobelt was "of a very expensive kind".
That conclusion has been criticised as unfounded. But to the contrary, it was sustained by the primary judge's following findings of fact. There was no evidence of the actual effective interest rates charged by Mr Kobelt. However, for illustration, the primary judge made a hypothetical calculation: assuming a $4,000 vehicle purchase and a $1,000 charge (that is, the usual price differential), with the aggregate of $5,000 being repaid by regular monthly instalments over a 12, 18 or 24 month period, the effective annual interest rates would be 43.4 per cent, 29.5 per cent or 22.4 per cent respectively. By way of comparison, according to forensic accounting evidence led at trial, a commercial lender would have charged interest on a variable unsecured personal loan in the range of 14 to 15.2 per cent. Mr Kobelt's rate for book-up on vehicles was therefore significantly in excess of the rates for personal loans.
The primary judge also considered expert evidence on the effective interest rate paid by four particular Anangu customers on their aggregate purchase of nine vehicles. The total interest (for all customers on the nine vehicles) using personal loan rates would have been $2,886.14. By comparison, the minimum total price differential that would have been charged by Mr Kobelt was $9,000 (that is, $1,000 per vehicle multiplied by nine vehicles). The plurality in the Full Court upheld the primary judge's finding that the credit charges for second-hand cars were "very expensive".
Mr Kobelt's position throughout the trial was that he did not charge interest or impose any charge for the provision of book-up. Consistently with that position, he did not disclose to his customers the existence of any charge. His counsel submitted at trial, in reliance on the expert evidence of Mr Paul Jorgensen, a forensic accountant, that Mr Kobelt's "interest free terms were better than customers could obtain from traditional finance institutions". But, as already explained, both the fact that certain credit attracted some kind of charge (in relation to the cars, purchase orders and the provision of cash) and the relative expense of certain of those charges were accepted by the primary judge. And those findings were not overturned on appeal.
Finally, there were charges for the purchase of the second‑hand cars, and, expensive or otherwise, they were not disclosed to Mr Kobelt's customers.
The fact that much of the credit supplied to Mr Kobelt's customers through book-up came at a substantial undisclosed charge cannot be ignored in assessing whether Mr Kobelt's conduct in connection with the supply of credit under his book-up system was, in all the circumstances, unconscionable. That is so even though ASIC did not attempt to prove that the cars were sold at a price above their market value. The problem was, and remains, the existence of the undisclosed credit charge. That conclusion is not altered by the fact that ASIC did not plead the expensiveness of credit as a particular of unconscionable conduct. As the plurality held in the Full Court, the cost of the credit was an issue at trial.
Effect of the arrangements − tying conduct
Mr Kobelt's system "tied" book-up customers to Nobbys. The primary judge found that this "tying" effect was a form of "exploitation" and that this, combined with Mr Kobelt's requirement that he have access to the whole of customers' incomes, was a form of "predation". The Full Court overturned these conclusions. By its notice of appeal, ASIC contended that the Full Court erred in overturning the findings of the primary judge that Mr Kobelt had engaged in predation or exploitation. At the hearing of the appeal, although counsel for ASIC contended that the words "predation" or "exploitation" meant no more than taking advantage of disadvantage, ASIC did not abandon the contention that the primary judge's findings on predation and exploitation (or that Mr Kobelt had "taken advantage") should be restored. Those findings should be restored.
The system deprived customers of independent means of obtaining the necessities of life. It prevented them from shopping in their own communities. It created a prolonged dependence on Mr Kobelt's exercise of discretion.
By making his customers dependent on a favourable exercise of his goodwill, Mr Kobelt placed them in a position of vulnerability, separate to and different from the vulnerability which existed at the time they entered into the book-up arrangement. The primary judge was right to describe the system as constituting "exploitation" and "predation".
Mr Kobelt's knowledge
The primary judge was satisfied that Mr Kobelt knew of the characteristics of his customers on the basis that it must have been obvious from the interactions he had with them.
ASIC did not contend that Mr Kobelt had adopted forms of undue influence or exerted undue pressure. The primary judge therefore made no finding to that effect.
Despite the illegibility of Mr Kobelt's records, it was not found that he maintained his records dishonestly, or used the key cards and PINs dishonestly. The primary judge said that Mr Kobelt acted with a degree of good faith, but at all times pursued his own interests, even when that was to the detriment of his customers. The primary judge found as a fact that some of the withdrawals from the customers' accounts were not authorised.
Advantages to customers?
In the Full Court, the plurality found that the primary judge had given insufficient weight to, among other things, the advantages to Nobbys' customers in alleviating the disadvantages associated with demand sharing and boom and bust expenditure. Unsurprisingly, in this Court, Mr Kobelt relied upon that finding, and the evidence said to support that finding, in seeking to demonstrate the advantages to customers of his book-up system.
Dr David Martin, a social anthropologist, was retained by ASIC and gave evidence at the trial. Dr Martin was described by the primary judge as having a deep understanding of remote Aboriginal people's relationship with money and financial transactions, including an understanding about "particular mechanisms by which Aboriginal people typically seek to structure and personalise relationships with outsiders in order to access goods and services which they value".
The primary judge described Dr Martin's evidence as "generally helpful and reliable". However, it is necessary to understand Dr Martin's evidence including the relevant findings made about it by the primary judge and the Full Court. He was retained to provide an opinion concerning certain of Nobbys' Anangu customers in relation to ASIC's (ultimately abandoned) secondary case directed to specific customers rather than the book-up system generally, as well as "any other Aboriginal customers of Nobbys with whom [he spoke] as part of [his] field trip". Dr Martin was instructed to assume that for the majority of Nobbys' Anangu book‑up customers: periodic payments into their accounts were those customers' only source of income; use of a key card was the primary or exclusive means by which the customers accessed their account; and the customer was a resident of a remote community, in the APY Lands, and had very limited or no assets and very little income.
Dr Martin's initial instructions were to report on, among other things, any facts or circumstances affecting customers' ability or willingness to question or negotiate the terms of book-up and to complain about those terms. Those instructions were later expanded to address an additional question, namely, "[w]hat, if any, social or cultural matters affect the ability or willingness of Aboriginal residents of the APY Lands" - that is, persons of the APY Lands generally, not those who identified as Nobbys customers - to understand the nature, terms, advantages and disadvantages of credit arrangements generally and of the specific arrangement provided by Nobbys; question or negotiate the terms of transactions (including credit arrangements) with traders; and complain about the terms of such transactions? Dr Martin conducted three field trips to the APY Lands, during which he spoke to a total of 23 Indigenous residents in Mimili and Indulkana.
Given that Dr Martin was never asked to express an opinion specifically with respect to the 117 customers the subject of ASIC's primary case (that is, directed to the book-up system generally), the primary judge considered that care had to be taken before accepting characterisations of the 117 customers that depended upon inferences drawn from characteristics of the Anangu population generally. Indeed, Dr Martin accepted in cross-examination, and in his report, that it was not reasonable to impute to all of Mr Kobelt's customers all of the characteristics which he had been asked to assume.
The primary judge referred to Dr Martin's description at trial of demand sharing as part of the "foundational principles of reciprocity, exchange and sharing within a hunter gatherer society". Dr Martin considered, however, that while it might be reasonable to come to the view that leaving key cards at Nobbys was part of a strategy to avoid demand sharing, Dr Martin had "no firm evidence to come to that view". In the result, the primary judge found that there was "very little evidence from the Anangu customers themselves that they handed over their key cards and PINs to Mr Kobelt in order to achieve … these outcomes. … [W]ith one exception, none [of the Anangu witnesses] said that it was the desire to avoid this kind of sharing which was the reason they engaged in [b]ook-up or that they shopped at Nobbys". Mr Kobelt's challenges to the primary judge's findings in respect of avoidance of demand sharing, and the extent to which the primary judge had considered Dr Martin's evidence in respect of this issue, were dismissed by the plurality in the Full Court.
The plurality were right to do so. As was explained in Thorne v Kennedy, where a transaction is sought to be impugned by the operation of vitiating factors such as, relevantly, unconscionable conduct, it is necessary for a primary judge to conduct a close consideration of the facts; and it is equally necessary for an appellate court to assess any challenge to the primary judge's conclusions in light of the advantages enjoyed by that judge. That is because an assessment of whether unconscionable conduct has been established calls for a precise examination of the particular facts, and the exact relations established between the parties. The advantage of a primary judge in seeing the parties and estimating their characters and capacities is "immeasurable".
Moreover, this appeal is concerned with Mr Kobelt's book-up system, not all book-up systems or even the generalised conception of book-up systems described by Dr Martin. It is concerned with the 117 recipients of book-up services identified as part of ASIC's case against Mr Kobelt, not all Anangu people or all Aboriginal people living in remote areas. In particular, there was very little evidence that those 117 customers chose to enter into the book-up system to avoid demand sharing. Therefore, this Court should be slow to go beyond the primary judge's findings of fact, which were upheld on appeal, and conclude, inferring from general information pertaining to the Anangu or remote Aboriginal people, that Mr Kobelt's customers entered into the book-up arrangements for cultural reasons and not due to their position of special disadvantage. The primary judge's factual findings dictate otherwise: due to their vulnerability, the 117 customers had little other choice.
Alternatives to Mr Kobelt's book-up system
The primary judge found that Mr Kobelt's book-up system went beyond what was reasonably necessary to protect his legitimate interests in two fundamental ways: by requiring that customers hand over key cards and PINs and by withdrawing the whole, or nearly the whole, of the available balance in the customer's account on each payday.
The primary judge identified other arrangements that Mr Kobelt could have used, which made the provision of key cards and PINs not reasonably necessary to protect his legitimate interests.
First, Mr Kobelt could have applied to be a "Participant" in the Commonwealth Government's "Centrepay" system. Once a supplier has been accepted as a Participant, Centrelink recipients may authorise Centrelink to pay part of their benefits to that Participant. The Centrepay facility is generally directed to essential services and only a selection of "additional services". Mr Kobelt said at trial that he would take up this option if it were offered to him, despite earlier difficulties he had encountered when he had enquired about participating in Centrepay. That said, doubts were expressed by the primary judge and by Wigney J as to whether the Centrepay facility would encompass the purchase of used cars, although Nobbys as a supplier of food and groceries might have been eligible for acceptance as a Participant.
Second, Mr Kobelt could have agreed on a direct debit arrangement with the purchasers of his cars. Mr Kobelt agreed that this system could work well if the customers could organise it.
Third, for customers who lived nearby, Mr Kobelt accepted that he could have retained possession of the customers' key cards but not their PINs. He could have handed the key card back to the customer when they came to Nobbys, with the expectation that they would do so on or shortly after each payday to effect a transfer to Nobbys in reduction of their debt.
Fourth, Mr Kobelt could have arranged deductions from customers' wages to pay off their debt.
In addition, to mitigate the disadvantages of boom and bust expenditure, some book-up customers could request that Centrelink make pension payments weekly, rather than fortnightly. There was no suggestion that such a facility would not also have been available to those book-up customers who were recipients of Centrelink benefits.
Wigney J in the Full Court questioned whether some of these alternatives were in fact reasonably available or feasible. In his Honour's view, the primary judge's analysis of these various alternatives tended to ignore evidence that suggested that the Anangu may have preferred Mr Kobelt's book-up system to the alternatives because it involved the personalisation of the financial transaction. It is true that the primary judge made limited reference to the personalisation of financial transactions, referring only to that concept in describing the expertise of Dr Martin. However, two further matters should be observed about this aspect of Dr Martin's evidence. Dr Martin's evidence was that there was a tendency for Indigenous APY Lands residents to personalise financial transactions by conducting financial transactions through "brokers" such as storekeepers to better access goods and services. This tendency was based on inferences Dr Martin drew from the assumptions set out in his instructions together with his observations and interviews. The limitations on the extent to which Dr Martin's evidence can be used to establish that the Anangu generally and Mr Kobelt's customers specifically had such a tendency are self‑evident. Further, there is nothing to suggest that the alternatives outlined above would result in any reduction, let alone any great reduction, in the personalisation of the transaction. It is plain that each retains some relationship with a local storekeeper including, specifically, that the credit is provided by a person known to the customer; it is simply the method by which book-up or another form of credit - each necessarily personal - is provided that is different.
In addition to the alternative arrangements identified by the primary judge, it is plain that another real alternative was and remains an appropriately functioning form of book-up. The characteristics of such a system are readily identifiable: an assessment of whether customers needed the credit facility and could afford the repayments; the disclosure of all fees and charges to customers; no retention as "security" of a customer's key card, let alone their PIN; the transfer of an agreed amount or proportion of weekly or fortnightly income, rather than the whole of a customer's income; legible and consistent records of the original credit advanced, the payments made, and a running total of the balance outstanding, imposing a discipline to keep these records up to date; and a system where the customers were not "tied" to the credit provider for the provision of other goods and services.
Finally, the Withdrawal Conduct is itself illustrative of the problems. That conduct revealed that Mr Kobelt worked actively to avoid some customers having access to the 50 per cent of the income which should have been available to them and that those customers were not content with having 50 per cent of their income available only at Mr Kobelt's discretion and only through his store or purchase orders. That conduct further supports the conclusion that the customers would not necessarily have chosen Mr Kobelt's book‑up system if the fact of alternatives was explained and made available.
Alternatives were available. There is nothing to suggest that these alternatives would not have worked and, in fact, in relation to some of them, Mr Kobelt agreed that they could work well.
Mr Kobelt's book-up system was unconscionable
Mr Kobelt accepted that statutory unconscionability was capable of applying to a system of conduct or pattern of behaviour and that his provision of credit to the 117 customers was conduct "in trade or commerce" and was conduct in connection with the supply of "financial services" to individuals. Therefore, the sole issue was and remains whether Mr Kobelt, in the implementation and provision of his book-up system, engaged in a system of conduct or pattern of behaviour that was "unconscionable" contrary to s 12CB(1) of the ASIC Act. For the reasons that follow, the answer is "yes".
ASIC advanced three grounds in respect of the Full Court's finding to the contrary. Those grounds related to the special disadvantage of Mr Kobelt's customers, the predatory and exploitative nature of Mr Kobelt's conduct, and the weight to be given to purported advantages arising from the book-up system in relation to the practices of demand sharing and boom and bust expenditure. Each identifies a matter central to the assessment of unconscionability in the circumstances of this case but none can be viewed in isolation. Accordingly, the issues raised by ASIC will be addressed in the context of assessing Mr Kobelt's conduct against the non-exhaustive list of factors in s 12CC.
The Court's focus must primarily be on the nature of the conduct by the stronger party. First, s 12CB(4)(b) extends s 12CB(1) unconscionable conduct to a "system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged". It follows from the fact that a specific person need not be identified that special disadvantage of an individual is not a necessary component of the prohibition. Indeed, Parliament's intention in this respect was explained in the following terms:
"[T]he focus of the provisions is on conduct that may be said to offend against good conscience; it is not specifically on the characteristics of any possible 'victim' of the conduct (though these may be relevant to the assessment of the conduct)." (emphasis in original)
That focus on the conduct of the stronger party reflects the difference between the equitable doctrines of unconscionable conduct and undue influence. The former is concerned with the conduct of the stronger party in unconscientiously taking advantage of the weaker party. The latter is concerned with the quality of the consent or assent of the weaker party. That distinction is also reflected in ss 12CB(1) and 12CC(1), where the prohibition in s 12CB(1) is against unconscionable conduct and "any undue influence or pressure ... or any unfair tactics" is only one of several factors to be taken into account if relevant.
The assessment of whether conduct is unconscionable within the meaning of s 12CB involves the evaluation of facts by reference to the values and norms recognised by the statute, and thus, as it has been said, a normative standard of conscience which is permeated with accepted and acceptable community standards. It is by reference to those generally accepted standards and community values that each matter must be judged.
Vulnerability or special disadvantage
Vulnerability or special disadvantage may arise from matters including "poverty or need of any kind ... [and] illiteracy or lack of education". Mr Kobelt's customers were vulnerable or at a special disadvantage. Their vulnerability existed because of the remoteness of their communities, the limitations on their education, their impoverishment, and the limitations on their financial literacy - not as a result of Anangu cultural practices. Both the primary judge and the Full Court accepted that Mr Kobelt's customers were vulnerable and there was no dispute that Mr Kobelt knew of his customers' special disadvantage.
Indeed, as the primary judge noted, the ready willingness of Mr Kobelt's customers to hand over their key cards and their PINs seems to reflect a lack of understanding of the precautions which they should take in their own self‑interest. As Wigney J observed, the Anangu plainly had a different conception of, and different attitude towards, their key cards and they trusted Mr Kobelt. But that observation, and that trust, do not provide an answer, or defence, to the fact that, in all the circumstances, Mr Kobelt's book‑up system was unconscionable contrary to s 12CB of the ASIC Act. Instead, the fact that the Anangu had a different conception of, and different attitude towards, their key cards and that they trusted Mr Kobelt is part of the factual matrix which identifies, and explains, their vulnerability and the voluntariness of their entry into the book‑up system as well as the significance of the other relevant factors listed in s 12CC(1), which are addressed next.
Mr Kobelt unconscientiously took advantage of his customers' vulnerability
The Full Court found that Mr Kobelt had not taken advantage of his customers' vulnerability because the customers understood the basic elements of Mr Kobelt's book-up system, including the Withdrawal Conduct; voluntarily entered into the book-up arrangements; had the ability to terminate the contracts; and had agency, which must be respected, and their freedom of contract should not be impeded.
There are a number of errors in that analysis. Vulnerable persons may be unable to protect their own interests. If a person, unable to protect their own interests, voluntarily enters into a transaction, this does no more than remove the conduct from it being the subject of relief on the ground of undue influence where the elements, and methods of proof, are quite different. It is because it is a transaction that is voluntarily entered into by someone under a special disadvantage that unconscionability, including statutory unconscionability, developed, in order to ensure that persons who are vulnerable and unable to protect their own interests are not the victim of conduct by a stronger party in unconscientiously taking advantage of that vulnerability. And that is what Mr Kobelt's book‑up system did.
The unconscionability of Mr Kobelt's conduct was that the 117 customers were at such a special disadvantage relative to Mr Kobelt so as to be unable to make a decision in their own interests, and Mr Kobelt, knowing or in circumstances where he ought to have known of their incapacity to make a decision in their own interests, took advantage of that disadvantage to get them to agree to his terms.
It is irrelevant that some of the customers might have regarded the requirements of Mr Kobelt's system as not unreasonable or considered that it alleviated pressures of demand sharing. The requirements of the system were unreasonable, regardless of any effects on demand sharing. Even if some of his 117 customers might have thought otherwise, the customers were so disadvantaged by their remoteness, the limitations on their education, their impoverishment and the limitations on their financial illiteracy, as well as the limited available alternatives, as to be in a position where they could not demand a superior system.
(i) Power imbalance: s 12CC(1)(a), (e) and (j)(i)
Mr Kobelt held all the power in the relationship. His Anangu customers were vulnerable and unable to protect their own interests. They were limited in their ability to acquire credit on the same terms, or at all, anywhere in reasonable proximity to the APY Lands, meaning that Nobbys had a near‑monopoly on the provision of credit. Further, Mr Kobelt did not provide credit to the Anangu on any other terms except book-up; and he was not flexible in relation to the requirement that customers provide their key card and PIN or in relation to certain other terms on which he provided credit.
The fact that there was no indication that the customers wished to bargain with Mr Kobelt is unsurprising. That is often the position with vulnerable persons: they do not know of potential alternatives and often, even if they are aware of such alternatives, lack the ability to negotiate. Moreover, s 12CC(1)(a) requires consideration of the "relative strengths of the bargaining positions" of the relevant parties. It is concerned with the existence of the power imbalance, not the wishes of the weaker party.
As against that, the ability of customers to frustrate the arrangements should be given little, if any, weight. The primary judge found that to frustrate the arrangements would require customers to "act in breach of their agreement with Mr Kobelt, that is, to act in a way which was dishonourable, if not dishonest". Mr Kobelt did not challenge this finding before the Full Court. That reinforced the power imbalance. And, no less importantly, it would be wrong to conclude that the theoretical ability of the weaker party to frustrate the wrongful conduct of the stronger party could ameliorate the wrongful conduct of that stronger party. That is the antithesis of unconscionability.
As has been observed, unequal bargaining power on its own is not sufficient to establish unconscionability. But it provides the context in which the remaining factors are to be assessed.
(ii) Circumstances of entry: s 12CC(1)(c), (i) and (j)(i)
The circumstances in which Mr Kobelt's Anangu customers entered into the book-up arrangements were characterised not only by a power imbalance, but also by a lack of transparency and lack of proper understanding of the arrangements, resulting in an inability of Mr Kobelt's customers to hold him to account.
When customers entered into the arrangements, Mr Kobelt failed to document and disclose properly, or at all, the terms and conditions of the arrangement, the amount and frequency of the withdrawals, the amount of the debt or charges or the price differential for the purchase of the second-hand cars. As the primary judge found, Mr Kobelt's customers would not have been able to understand his inadequate and often illegible records.
Wigney J considered that these facts and matters did not deserve any significant weight for two reasons: (1) there was a cultural preference for Anangu customers to deal with business matters "face-to-face [rather] than be provided with a sheath [sic] of documents"; and (2) there was no evidence that any customer had sought an account of the transactions. That analysis is incomplete: it interprets s 12CC(1)(c) too narrowly.
The problem was that there was no transparency or accountability under Mr Kobelt's system. Mr Kobelt's "face-to-face" interactions did not enable customers to have a proper understanding of the terms of the book-up arrangement. When customers entered into the book-up arrangement they had only an understanding of the "basic elements" of the arrangement. That meant that the customers did not have a clear understanding of exactly how much Mr Kobelt would withdraw; how often and at what time of day he would withdraw; where their funds would be kept; whether and through what mechanism they were entitled to access their funds; how much they could access at a given time and to what uses it could be put; the fact that book-up for second-hand cars attracted a charge; and the fact that there were alternatives. Put simply, Mr Kobelt's book-up system was characterised by a complete lack of transparency and accountability. A cultural preference for oral communication does not justify exploitation or taking advantage of people without their knowledge or in the absence of full disclosure. Instead, the preference for oral communication demands that the credit provider provide the financial service in a manner which addresses that preference.
(iii) Mr Kobelt's book-up system and its implementation: s 12CC(1)(d), (j)(ii)‑(iv) and (l)
Mr Kobelt's book-up system, and his implementation of it, allowed Mr Kobelt to engage in wrongful conduct to obtain a financial benefit to the detriment of his customers.
The primary judge said that Mr Kobelt acted with a degree of good faith, although that statement was qualified with the statement that Mr Kobelt pursued his own interests at all times, even when that pursuit was to the detriment of his customers.
What the unchallenged factual findings established was that Mr Kobelt's book-up system enabled him to abuse his position of power to the detriment of his customers.
As has been explained: the circumstances of entry; requiring customers to hand over their key card and PIN; Mr Kobelt withdrawing the whole, or nearly the whole, of the available funds by trial and error and deliberately before customers could access their funds by other means; there being no objective justification for withdrawing all or most of the available funds as soon as they were deposited; Mr Kobelt controlling how much of their funds that his customers could access and what they could spend those funds on; and there being no transparency (meaning that Mr Kobelt's customers could not hold Mr Kobelt to account), compel that conclusion.
The conclusion is reinforced by the ways Mr Kobelt carried out the arrangements, not always complying with the terms of his arrangement, and making the withdrawals causing overdrafts in connection with the CBA glitch. Contrary to the Full Court's conclusion, s 12CC(1)(j)(iv) requires consideration of the post‑contractual conduct of the parties.
(iv) Tying
Mr Kobelt's book-up system tied his customers to Nobbys. It created a prolonged dependence on Mr Kobelt's exercise of discretion. It placed them in an ongoing and increased position of vulnerability. Mr Kobelt exercised a high degree of control over his customers' funds and expenditure by precluding access to their funds, preventing them from being able to access the necessities of life and making them dependent on his discretion.
"Tying", in various forms, has been the subject of restriction and condemnation for over a century in Australia, the United Kingdom and the United States. That condemnation, for the most part, arose because the parties did not bargain from a "position of equality" or because the covenant that tied the purchaser to acquire the seller's products was unreasonable or contrary to the public interest.
Moreover, the sale of second-hand cars using book‑up was itself exploitation. Although he refused to acknowledge the price differential at trial, Mr Kobelt required purchasers of cars on book-up to pay significantly more than purchasers with cash. The sale of second-hand cars meant customers were caught in a vicious circle of indebtedness to Mr Kobelt and then, once locked into the book-up arrangement, customers had limited options to regain control of their funds. Their potential options were a cash advance, at Mr Kobelt's discretion and sometimes at a fee of ten per cent, or to request a purchase order, again at Mr Kobelt's discretion, at a cost of $5 or $10 and, even then, several stores in the APY Lands would not accept Mr Kobelt's purchase orders.
The lack of suggestion of dishonesty on the part of Mr Kobelt does not prevent Mr Kobelt's book-up system being unconscionable. Dishonesty is not required for a finding of unconscionable conduct in equity. And statutory unconscionability under the ASIC Act is intended to be broader than the unwritten law. Dishonesty is not required for a finding of unconscionability under s 12CB(1).
Unconscionable conduct in equity can include the passive acceptance of a benefit in unconscionable circumstances. Mr Kobelt's conduct went beyond that − he engaged in an active system of conduct that, even if approached without dishonest motives or with a "degree of good faith", had the effect of being exploitative and unfair. The requirement is still "victimisation or exploitation" by a stronger party of a more vulnerable party. And that was the problem with Mr Kobelt's book-up system.
(v) Values, norms and practices
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.
The plurality in the Full Court considered that it was enough that the customers understood the basic elements of the system and entered into it voluntarily and, either serendipitously or otherwise, derived from it the benefits of alleviating the boom and bust expenditure cycle and the burdens of demand sharing. Wigney J added, in effect, that it was not unconscionable to impose those terms of credit on the customers because of the differences between "the values, norms and practices of the Anangu people who comprised Mr Kobelt's book-up customers" and the norms and practices of "the wider Australian society and its culture and institutions".
That reasoning should be rejected. 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. As the primary judge held, it was the fact that the customers were so significantly disadvantaged, and that Mr Kobelt knew or should have known it to be so, that rendered his conduct unconscionable. Nor is it to the point that the customers may have entered into the scheme voluntarily and without undue influence. Mr Kobelt's book-up system was unconscionable because it took advantage of the customers' vulnerability and special disadvantage. No doubt, Mr Kobelt was in business to make a profit and it cannot reasonably be expected of him that he should have acted as if he were a charity. It is also apparent that there were other traders in the area who provided book-up credit on similar terms and that, apart from book‑up, such other forms of credit as were available to the Anangu were limited. It may be, too, that the Anangu liked to go shopping in Mintabie and preferred dealing face‑to‑face with people like Mr Kobelt to attempting to arrange credit with mainstream credit providers. And it may also be that participating in book-up gave some customers a degree of control over boom and bust expenditure patterns and an excuse to avoid demand sharing requests. But none of that renders Mr Kobelt's conduct any the less unconscionable.
The freedom to make a profit is not a licence to act unconscionably. Nor is an oligopoly of the kind in which Mr Kobelt participated. And the fact that other traders may have behaved in the same unconscionable manner does not excuse it.
(vi) Mr Kobelt's book-up system was not reasonably necessary to protect his legitimate interests: s 12CC(1)(b)
This issue has been addressed. Book-up is not itself unconscionable. The problems were with Mr Kobelt's book-up system and its particular features. Mr Kobelt's system was not reasonably necessary to protect his legitimate interests − there were alternatives. It may be that, in circumstances of the kind which existed in Paciocco v Australia & New Zealand Banking Group Ltd, s 12CB(1) would not be enlivened merely by reason of the content of a condition of a consumer credit contract. But, even then, it would depend on the circumstances of each case whether the consumer was at a relevant disadvantage to the credit provider and in particular whether the credit provider, by stipulating for a particular condition of the credit contract, should be seen to have taken unconscientious advantage of that consumer. Here, for the reasons already given, there can be no doubt that the Anangu were at a material, relevant disadvantage to Mr Kobelt and that Mr Kobelt took unconscientious advantage of them by stipulating for the conditions he did notwithstanding that other, less onerous requirements would have been adequate to protect his legitimate interests. Here, there can be no doubt that s 12CC(1)(b) is applicable and to a significant degree informs the engagement of s 12CB(1).
Conclusion and orders
Mr Kobelt's system of conduct was unconscionable contrary to s 12CB(1) of the ASIC Act. The orders should be: