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Commercial Bank of Australia v Amadio

Info: 3276 words (13 pages) Essay
Published: 6th Aug 2019

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Jurisdiction / Tag(s): Australian Law

The ever expanding consumer population has found ways of redress according to legislation and general law in Australia. This was necessitated as a result of being disadvantaged by unfair and discriminatory practices by large conglomerates. This paper deals with the changes in the common law and statutory developments in trade practices based on the outcome of the dispute between Commercial Bank of Australia Ltd and Amadio (Case no: 151 CLR 447; 1983). This paper will also review the introduction of ‘unconscionability’ in the Trade Practices Act and how it forms a substantiative part of the contract between the involved parties. The Amadio was the first case in which unconscionable conduct was used and thus, became the driving force behind the amendment of unconscionability in the Australian law of contract. There has been a rise in consumer protection laws which look to provide justice to consumers, enforcing the “unconscionable conduct” clause to contractual relations. The ownership of the business transaction rests largely on the trader thereby ensuring that the transaction is reasonable and fair.


Unconscionable conduct as a principle was initially designed to uphold equity and fair play. It defines unconscionable behaviour as that which attracts censure and justifies the courts in granting relief to those who suffer by it. In Australia, the doctrine was put into practice by the High Court in the Blomley v Ryan case and its validity was further strengthened in the Commercial Bank of Australia Ltd v Amadio case of 1983.

Facts of the case:

An elderly Italian migrant couple, Mr. and Mrs. Amadio stood as guarantors against their son’s loan for his construction business from the Commercial Bank of Australia. The bank manager, Mr. Virgo, who was in close communication with the son, Vincenzo Amadio, had better understanding of the business reality and knew that the son had probably misrepresented facts in a bid to get his parents to stand as guarantors. Subsequently, when Vincenzo Amadio’s business failed, the bank was required to enforce the guarantee by mortgaging the building owned by Amadios.

The issue:

The issue in the court was whether the Amadios were bound by the contract of guarantee taking into account the circumstances in which they signed it:

Amadios had little understanding of the English language

They did not seek professional and independent advice with respect to the contract. The bank manager, Mr. Virgo, having some knowledge of Vincenzo Amadio’s business situation, did not suggest the Amadios to seek independent advice.

At the time the mortgage was being executed, the bank had some idea of the son’s unstable financial situation and was aware that the Amadios were probably ignorant of that fact.

The Amadios had assumed the liability to be limited to $50,000; however, the bank did not inform the Amadios that there was no limit on their liability as guarantors.

In the decision his honour Justice Manson held that the bank manager knew about the special disability (Keogh 1999) of Amadios and yet did not step forward to ensure that they understood the nature of the transaction. Therefore the bank’s taking advantage of the opportunity which presented itself was unconscientious. This is the underlying basis on which the unconscionability clause rests.

Outcome of the Court’s decision:

A new concept has been added by general and contractual law and has been passed by Australian legislation based on the Amadio case 1983. The term unconscionability can be distinguished in two ways.

Procedural unconscionability which refers to the disadvantage suffered by a weaker party in negotiations.

The stronger party is taking advantage of the fact that the consumer either lacks enough knowledge or understanding of the contract or is incapable of making an independent decision. The trader does not point out that the consumer has avenues in getting help in clearly understanding the contract. So in this case, the trader is taking advantage of the consumer’s lack of understanding for his own benefit.

Substantive unconscionability which refers to the unfairness of terms or outcomes.

This could also point towards the use of undue influence/ coercion (Goldring 1990). In this example, the consumer is not in a position to make an independent decision based on the fact that undue influence is made to bear upon him/her.

Most often the previous leads to the latter case but not always. The court will not determine whether someone has a good or bad bargain, merely whether they had the opportunity to properly judge what was best in their own interests. Since unconscionability usually results from an imbalance in bargaining power, individuals and small companies can easily turn to unconscionability; large corporations usually bear the brunt.

This is to ensure that the stronger party is aware of the other party’s disadvantage or ought to be sentient of their issues. In the Amadio case the verdict suggests that if the stronger party can prove in the court that the contract was fair, just and reasonable (Gillies 2004) then the transaction may not be impugned.

Statutory developments:

Various developments in common law and statutory practices have emerged since the decision under Commercial Bank of Australia v Amadio case. This includes the Trade Practices Act 1974, Australian Securities and Investments Commission Act 2001, the Corporations Act 2001 and various industry codes of conduct. In addition to the above laws there is a special Contracts Review Act 1980, which attempts to deal with unfair and unconscionable contracts.

Trade Practices Act

In 1992, a new Part IVA called Un-conscionable Conduct was incorporated in the Trade Practices Act, 1974. This new part contains a new section 51AA which expressly refers to and applies the common law principle of unconscionable conduct to transactions between businesses as distinct from consumer transactions. A companion section, s 51AB, is a restatement of the previous section 52A, that has now been repealed, which prohibits unconscionable conduct in ordinary consumer transactions. The Trade Practices Commission issued a direct to s 51AA or Unconscionable Conduct in Commercial Dealings in October 1993.

Part IVA of the Trade Practices Act includes three separate subsections viz. 51AA, 51AB and 51AC to deal with ‘unconscionable conduct’. Although, section 51AA deals only with ‘procedural unconscionability’ that encompasses the formation of a contract, the remaining two sub-sections 51AB and 51AC deal with ‘substantive unconscionability’ which refers to the actual functioning of a contract.

Section 51AA

This section of the Trade Practices Act prohibits a corporation from engaging in conduct that may be represented as unconscionable in its trade and commercial dealings under the single common law of the States and Territories. The common unwritten law refers to the legislation created by the courts of common law and equity. The term unconscionability in section 51AA was brought about as a change from the traditional unconscionability doctrine referring to special disadvantage and unconscionable bargains. Special disadvantage serves to protect individuals who, in seeking to make judgments in their best interests, are disabled by age, infirmity, mental illness or other characteristics. A contract that is formulated under this duress is known as a breach of procedural unconscionability (ANU 1998). This section of the Trade Practices Act takes into account the conditions under which a contract is signed.

In dealing with Amadio case of 1983, Justice Mason expounded that an ordinary disparity in the bargaining powers of the two parties involved in a transaction will not qualify for special disability. For one of the parties to be considered for special disability there has to be sufficient reason to believe that the ability in making a correct judgement in one’s own interest is impacted severely for that party. The verdict in the Amadio case also made it known that it was the setting in which a contract was drawn up that was relevant in establishing if the contract was unconscionable. If the terms of the contract are harsh, it cannot be the sole reason for the contract to be impeached under the criterion of unconscionability. The condition under which the contract is drawn up is just as required to establish unconscionable conduct within the contractual agreement.

Section 51AB

This section proscribes unconscionability in consumer transactions, and also points out various factors that indicate unconscionability. This is significant in clarifying whether a consumer is at a special disability and if the concept of unconscionability is applicable in the given circumstances. Subsection 51AB was the original stipulation on unconscionable conduct in the Trade Practices Act. It had been introduced in section 52 of the TPA in 1986 which was later amended and included as section 51AB in 1992.

Subsection 51AB (1) states that a business or company must not engage in any conduct that is in all circumstances, unconscionable; be it in trade, commerce, or in connection with supply of goods or services to a person.

Subsection 51AB (2) refers to the matters in which a court may consider a corporation to have breached a contract and may use the information given to determine the extent of the contravention of subsection (1). The parameters include:

the relative bargaining powers of the trader and the consumer;

whether the weaker party or consumer was asked to meet the terms of the corporation in compliance with reasonable and necessary protection of the genuine interests of the corporation;

whether the consumer had been able to understand clearly the terms of the documents related to the supply of goods and services;

whether any undue influence or pressure tactics were used to coerce the weaker party to submit to unfair terms of the contract in relation to goods or services;

the requisite amount needed to acquire identical or equivalent goods or services from another trader than the one in question.

Section 51AC

In order to quell concerns with existing statutory and common laws, this new section was added to the Trade Practices Act in 1998. The previous provisions were not well equipped to protect small businesses from unfair and exploitative contracts. Section 51AC attempts to free small commercial transactions from morally reprehensible conduct and represents the present trend towards legal evaluation of normative conduct in business contracts. The courts use it to determine if the conduct of the supplier as given in 51AC(3) or the acquirer as in 51AC(4) is unconscionable. The factors are:

  • if conduct is consistent with other dealings;
  • if any industry code is applicable;
  • if there has been any non-disclosure of facts to influence the other party’s decision;
  • the degree and fairness of the negotiations;
  • if contractual right of supplier/ acquirer vary;
  • the extent of good faith of the two parties.

Unconscionable conduct in financial services

Reforms were introduced on 1 July 1998 for the financial services sector. Under these changes, the Australian Securities and Investments Commission (ASIC) assumed primary responsibility for consumer and small business protection issues in this sector. The respective application of those three types of unconscionable conduct provisions to contracts of financial services is determined by considering particular exclusions and definitions under the ASIC Act section 12CA, CB and CC.

Although financial services and products are clearly defined in the Australian Securities and Investments Commission Act 2001, the unconscionable conduct provisions under the ASIC Act mirror those of the Trade Practices Act, and therefore businesses have equivalent compliance obligations when dealing in financial services.


The provisions of section 51 AB (TPA act) are mirrored in section 12CA of the ASIC Act which refers to the meaning of unconscionable conduct as given in the single, unwritten law. (1) This section forbids an individual from engaging in unconscionable conduct with respect to financial services when dealing with trade or commerce as the term is explained in the unwritten law.

(2) This section does not hold true for conduct prohibited by section 12CB.

Section 12CB mirrors the provisions under Section 51AB(TPA), which prohibits unconscionable conduct directed towards consumers in relation to financial services and section 12 CC mirrors the provisions under section 51AC(TPA), which prohibits unconscionable conduct in business transactions in respect of financial services.

Unconscionable conduct is also prohibited under a number of industry-specific legislative schemes. For example, legislation governing retail tenancy, an industry the panel has been asked to consider in its review, in each jurisdiction prohibits unconscionable or similarly unfair conduct by parties to a retail lease. Similar provisions can be found in legislation governing tourism services, fitness services, and residential property. Many of these provisions echo the terms of section 51AC of the TPA, and the statutory factors that are provided as being relevant to a finding of unconscionable conduct.

Fair Trading Acts

All states and territories have incorporated some form of prohibition on unconscionable conduct in their fair trading laws. The provisions under The State and Territory Fair Trading legislation mirror the terms of section 51AB of the TPA. The basic proposition of the Act is that the businesses should be aware that the statutory protection against unconscionable conduct in consumer transactions is available in a range of venues in addition to the Federal Court. Although the law is applicable only to persons and not corporations, the section 43 of Act relates to unconscionable conduct by suppliers to consumers, therefore is inapplicable to farmers as business people; but it remains applicable to farmers as ordinary consumers.

Contracts Review Act 1980

The Contracts Review Act is a special act which is passed by New South Wales to deal with unfair and unconscionable contracts. The terms of this act are in some ways similar to the one of section 51AB of the Trade Practices Act and are also supposed to be not available with respect to ordinary business transactions. The courts have nevertheless taken a very generous view of what constitutes a non-business transaction and have provided relief in circumstances like in Amadio and Warburton under the Contracts Review Act, that is, the courts have allowed relief in respect of transactions with a distinctly business element to them. The act provides very flexible remedies.

The Act stresses on “unjust contracts” which are defined by reference to a list of criteria. The Act does not just focus on unconscionable bargaining tactics or inequality or pressure. It also incorporates issues like substantive unfairness such as harsh terms or an unfair exchange.

In addition to the above statutory laws, the provisions of unconscionable conduct are also present in the Australian Consumer Law or ACL part of a schedule in the Competition and Consumer Act of 2010. Section 22 of ACL prohibits unconscionable conduct in small business transactions. It states that small business enterprises need to know how to prevent and rectify any injustice done to them if they have been the target of unconscionable conduct. To qualify as small business, the business subjected to unconscionable conduct cannot be listed publicly, that is, have its shares on the stock market. If none of the provisions are met, section 22 cannot be applied; however, there are quite a few other remedies available under section 20 of general unconscionable conduct and some sections of the common equity law.

Remedies – General:

Under TPA Sections 51AA, 5lAB and 51AC do not affect an individual’s right to seek redress under the unwritten law. Parties who choose to take private action under the Trade Practices Act may seek redress in the form of an injunction (s. 80) and/or certain other orders (s. 87). These other orders, which a person must seek within six years of the cause of action relating to the conduct arising may include:

  • compensating a person for loss or damage
  • declaring a contract void in whole or in part
  • altering a contract or arrangement
  • requiring a refund of money or return of property
  • requiring that specified services be performed.

Damages (section 82) may be awarded if a person suffers loss or damage by the actions of another in breach of Part IVA. Damages may also be recovered against a person involved in a contravention. An action for damages must start within six years of the cause of action relating to the conduct arising. Pecuniary penalties (i.e. fines) are not available for breaches of Part IVA.

Remedies available to the Australian Competition and Consumer Commission:

The ACCC itself may take either administrative or court action against a business or individual that has engaged in unconscionable conduct in contravention of ss. 51AA, 51AB or 51AC. The action taken will depend on both the ACCC’s priorities and the nature of the particular conduct. Administrative action may take several forms. For example, in the first instance, the ACCC may request that someone stop certain conduct or change particular trading practices. In more serious instances it might accept an enforceable undertaking from the company concerned and make these public. The court can enforce written undertakings upon application by the ACCC (section 87B). If a matter cannot be resolved administratively, the ACCC may take court action. The ACCC can seek injunctions (section 80) or other orders (section 87). It may also take representative action on behalf of people who have suffered, or are likely to suffer, loss or damage as a result of conduct by a person in contravention of Part IVA(section 87(1A)(b)).

The ACCC can also seek a community service order (section 86 C(2)(a)), probation orders (s. 86 C(2)(b)), orders for disclosure of certain information (section 86C(2)(c)) and corrective advertising (s. 86C(2)(d)). Except for injunctions, applications seeking orders from the court must be made within six years of the cause of action that relates to the conduct arising

(s. 87(1CA))

In conclusion it can be said that the legal doctrine of unconscionable conduct, in its application, sweeps aside a basic principle of contract law (i.e. that parties who sign a contract are bound by the terms of the agreement). There are now both statutory and non-statutory checks designed to provide to aggrieved party(person or corporate entity) with remedies against unconscionable conduct in their dealings with other parties( person or entity).

Indeed, the case of Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 is significant in terms of setting a precedent in trade practices.

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