High Court finds removing customer safeguards can lead to unconscionable conduct

Productivity Partners Pty Ltd v ACCC; Wills v ACCC [2024] HCA 27.

What you need to know

• The High Court of Australia has decided that, under the Australian Consumer Law (ACL), it was unconscionable to remove key safeguards which mitigated the risk of unsuitable or unwitting students incurring significant debts for no benefit, even without evidence that the decision makers wanted those risks to eventuate to the detriment of the students.
• The High Court also clarified that an individual may be liable for corporate unconscionable conduct as an accessory where they are aware of the essential matters comprising the conduct. This does not require the individual to know it is "unconscionable" as a matter of law, but does require the individual to know the details of the conduct and know that there are manifest, common or prevalent risks of harm to consumers because of it.
• Similarly, the High Court confirmed that an individual may be liable for misleading or deceptive conduct where they know the essential elements of the conduct, including that there are representations that are false, but do not need to know that the conduct is, as a matter of law, misleading.
• This decision is relevant to understanding corporate and individual liability for risk management decisions under both the ACL and parallel statutory regimes such as the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

What you need to do

• A company can be liable for unconscionable conduct based on the state of its systems for managing risk, and officers can have accessorial liability for making decisions that make those systems less effective at managing risk.
• Decision makers involved in managing corporate risk management protocols should be familiar with not only the protocols themselves but also the underlying risks (especially risks to external stakeholders such as consumers or investors) controlled by the protocols.
• These decision makers should play an active role in testing whether current risk management protocols, or proposals to modify protocols, adequately address risks to external stakeholders. This is especially important when considering proposals to relax risk management protocols.

Background facts

Productivity Partners Pty Ltd, trading as Captain Cook College (the College), provided online vocational education and training (VET) courses, which were funded through a Commonwealth scheme. Mr Blake Wills was Chief Operating Officer of the College's parent company, Site Group International Ltd (Site Group). From November 2015 to January 2016, he was also acting Chief Executive Officer of the College.

The Commonwealth funding scheme provided that students would incur a debt representing the fees the Commonwealth paid to the VET provider if they enrolled in a course and remained enrolled past the "census date". In 2014 and 2015, a Senate inquiry and media reports had publicly identified risks that VET providers would enrol students who did not understand the requirement to pay the course fees or have the ability to complete the courses.

On 7 September 2015, to increase profitability, the College removed the following two safeguards from its enrolment processes:

• contacting newly enrolled students to ensure that they understood their financial commitment, and to identify any reasons why they may be unable to undertake their courses; and
• automatically withdrawing students before the census date if they were not engaged online and were uncontactable during the first weeks of study.

These safeguards mitigated the known risks of unwitting or unsuitable students becoming and remaining enrolled at the census date, and thereby incurring substantial fees for courses which they would not commence. Therefore, removing these safeguards enabled students to be enrolled more quickly and easily, and ensured that they passed through census in greater numbers.

During the year following September 2015, the effects of removing the safeguards were significant: the College's enrolments increased by a factor of ~20; the percentage of students who withdrew or were withdrawn prior to census declined to ~20%; and the percentage of enrolled students who did not complete the course increased from ~93% to nearly 100%.

The Australian Competition and Consumer Commission (ACCC) brought proceedings in the Federal Court. The ACCC alleged that the College's conduct in removing the enrolment safeguards was in all the circumstances unconscionable contrary to s 21(1) of the ACL. The ACCC also alleged that Mr Wills (and, through him, Site Group) was knowingly concerned in, or a party to, the College's unconscionable conduct and therefore liable for a pecuniary penalty under s 224(1)(e) of the ACL, and disqualification from managing corporations under s 248.

History of proceedings

The ACCC succeeded before the Federal Court (Stewart J) at first instance, and before a majority of the Full Court of the Federal Court (Wigney and O'Bryan JJ, Downes J dissenting) on appeal.
As explained below, the primary judge, and the majority of the Full Court, found that the College had engaged in a system of conduct or a pattern of behaviour that was unconscionable. Mr Wills (and, through him, Site Group) was also found to be knowingly concerned in and liable for the College's systemic unconscionable conduct.

Unconscionable conduct by the College

The College engaged "course advisers" to market to and recruit potential students, and paid the advisers a commission of 20 per cent of the applicable course fees when students passed their census dates. The College knew of the risk that these course advisers might engage in unethical or careless conduct in recruiting students. For instance, over a two-year period, the College recorded more than 200 complaints of misconduct by course advisers.

The College also knew of the risk of enrolling students who lacked the requisite literacy or numeracy skills, or technology access or skills, to undertake the online courses in which they were enrolled. For instance, an internal audit of one of the College's "online campuses" revealed high rates of disengaged students being enrolled. During the relevant enrolment period, around 85 per cent of students who were enrolled at that campus and passed their census date never accessed the online learning management system.

Therefore, the lower courts held that the College acted unconscionably by removing two safeguards in circumstances where they knew of the risks of harm to students. In doing so, the College took advantage of students who had enrolled as a result of course adviser misconduct, or were unsuitable for their chosen course of study.

Accessorial liability of Mr Wills

The lower courts also held that Mr Wills was knowingly concerned in the College's unconscionable conduct and therefore also liable for it. He was a key driver of changes to improve the College's financial performance and, while he was not the architect of removing the safeguards, the relevant decisions to do so were reported to him and he oversaw their implementation.

Mr Wills also had knowledge of the risks of removing the safeguards. He knew that the changes were meant to enable students to be enrolled more quickly and easily, and to ensure that they passed through census in greater numbers by abolishing a significant contribution to attrition.

However, the Full Federal Court overturned one aspect of the primary judge's ruling on accessorial liability. The Full Court held that Mr Wills was an accessory not from 7 September 2015, but only from when he became acting CEO of the College in November 2015. This was on the basis that Mr Wills was not aware on 7 September 2015 of the full consequences that removing the safeguards would have on the enrolment of unsuitable students.

High Court decision

The College and Mr Wills unsuccessfully appealed to the High Court, which broadly considered two issues. First, did the College engage in unconscionable conduct? Second, if so, was Mr Wills knowingly concerned in the College's unconscionable conduct and therefore liable as an accessory to that conduct?

The High Court unanimously dismissed the appeals of the College and Mr Wills. Across six judgments, the Court addressed in particular the following issues.

Unconscionable conduct by the College

The College argued that it did not act unconscionably in removing the enrolment safeguards because it did not intend for the relevant risks ameliorated by the safeguards (ie the risks of unwitting or unsuitable students becoming and remaining enrolled at the census date) to eventuate.

All members of the Court rejected this argument, but with different emphases in their reasoning:

• Gageler CJ and Jagot J in a joint judgment (Gleeson and Beech-Jones JJ agreeing) held that this argument was wrong in principle. Gageler CJ and Jagot J noted that section 22(3)(a) of the ACL implies that, when determining whether conduct is unconscionable, the court may have regard to circumstances that were reasonably foreseeable at the time of the alleged contravention. In this case, the reasonably foreseeable circumstances included an increase in the risk of course adviser conduct going undetected, and an increase in the risk of unsuitable students being enrolled. In any event, Gageler CJ and Jagot J noted that the College intended to regain its market share and, as a consequence, took advantage of the people enrolled.
• Gordon and Edelman JJ instead held that the College did intend these risks to eventuate. Each concluded that the design of systems (like risk management systems) reveals and gives effect to corporate intention to achieve certain ends. The end of the College was profit maximisation and the means were removing safeguards against unwitting or unsuitable enrolments.
• As a step in reaching the conclusion that the College's conduct was unconscionable, the Court also held that it is not necessary for a Court to refer to each of the matters listed as potentially relevant in s 22 of the ACL if that does not arise on the evidence. This means that, when bringing proceedings for alleged unconscionable conduct, a regulator like the ACCC does not need to raise each of the matters listed in s 22 (although Gleeson J criticised the ACCC for failing to more clearly link its case to at least one of the matters listed in s 22(1)).

Accessorial liability of Mr Wills

Mr Wills argued that he was not an accessory to the College's unconscionable conduct because he did not know that the College's conduct was "unconscionable" as a matter of legal characterisation (ie that the conduct involved taking advantage of consumers or was otherwise against conscience).

The High Court affirmed that the test of whether a person is "knowingly concerned" in a civil contravention of a statutory prohibition requires the following:

• a person must intentionally participate in conduct that implicates or involves them in the contravention; and
• in doing so, they must have knowledge of the essential facts, matters or circumstances that make up the contravention.

The various judgments provided different (but broadly consistent) guidance on how the "essential facts, matters or circumstances" of a particular contravention can be identified:

• Gageler CJ and Jagot J held that an accessory must have knowledge of the "essential matters" (whether they are facts, circumstances or states of mind) constituting the contravention, and does not need to know the "character, quality, nature or status of those matters for the purpose of the characterisation of the conduct the statute requires" — this, their Honours said, was not the same as a distinction "between facts and the law" or between "objective facts and evaluative facts";
• Gordon J (with Steward J agreeing) identified that an accessory must have knowledge of the facts that show that a contravention was committed (eg in this case, by the College) but do not need to have knowledge of the "normative judgment" that a Court may make of those facts (eg as being "unconscionable");
• Edelman J emphasised that an accessory must intend to participate in the essence of the conduct that constitutes the contravention; and
• Beech-Jones J (with Gleeson J agreeing) held that the accessory must know the essential matters, circumstances or facts of a person's conduct, but does not need to know these "constitute an offence" or "the legal characterisation or complexion" of the conduct.

It remains unclear whether these formulations are substantively different once applied to specific contraventions of the law. All members of the Court held that the characterisation of the College's conduct as "unconscionable" was not one of the essential matters, facts or circumstances which made up the College's unconscionable conduct. And all members of the Court resolved a related debate among lower courts by holding that accessorial liability for misleading or deceptive conduct (at least in cases based on a false representation) requires a person to know that an impugned representation is false.

The Court held that Mr Wills had the requisite knowledge to be an accessory to unconscionable conduct because he knew: there were ongoing risks of unwitting or unsuitable students being enrolled in their courses; the enrolment safeguards had been in place to protect against those risks; and removing the enrolment safeguards as a means of improving the College's profitability would increase those risks. While Mr Wills did not know the precise effect of the safeguards against these risks, he knew that abolishing the safeguards would lead to an increase in the number and proportion of students who would be enrolled and receive no benefit from their enrolment — he had seen audit results of a related education provider which made this effect clear. On the issue of timing, the Court overturned the Full Federal Court, finding that Mr Wills knew of these essential matters by 7 September 2015 when the safeguards were removed.

Implications

Risk mitigation and unconscionable conduct

The judgments provide some guidance in considering how the prohibition on unconscionable conduct applies to the mitigation of risks inherent in a particular business model.

Where it is known or reasonably foreseeable to a service provider that there are manifest, common or prevalent risks of harm to consumers, it may be insufficient for the service provider to show they:

• did not actively seek that those risks occur and consumers be harmed;
• did not create the risks in question (eg the risks in this case were inherent to the VET funding scheme); or
• had some risk management controls in place, if there is evidence that they are or would be inadequate.

But the judgment of Gageler CJ and Jagot J distinguishes such cases from that of a "mere risk" (or possibility) involved in a commercial judgment that is later proven incorrect. This provides some comfort that good faith decisions as to risk management, made amid genuine uncertainty as to the likelihood of risks eventuating, would not constitute unconscionable conduct.

Accessorial liability

The decision provides specific guidance on the knowledge required for accessorial liability in relation to unconscionable conduct and misleading or deceptive conduct, which are prohibited by both the ACL and the ASIC Act. Decision makers who oversee particular corporate conduct that is found by a court to be unconscionable (or misleading or deceptive) may be liable as accessories to that conduct, even if they are not aware that the conduct can be legally characterised as "unconscionable" (or "misleading or deceptive").

However, there may still be difficulties in determining what are the "essential facts" of other, more complex contraventions. This is an important consideration given the use of the "knowingly concerned" language across a range of Commonwealth civil penalty prohibitions.

Still, the following general proposition appears to be true: accessorial liability arises when you know enough about a person's conduct that you should know the risk that the law prohibits that conduct, but you assist with the conduct (including by overseeing the conduct) anyway. A person, knowing that their business is making a false statement, or is increasing its profits by allowing unsuitable students to incur significant debts, should know the risk that the law would prohibit that conduct, even if they do not know of the exact prohibitions on misleading or deceptive and unconscionable conduct.

Therefore, decision makers should understand the risks associated with the corporate conduct that is within their remit, and be proactive in querying the merits of conduct that increases the risk of detriment to external stakeholders such as consumers or investors.

Authors: Justin Jones, Partner; Mark Bradley, Partner; Matthew Harper, Senior Associate and Oscar Han, Lawyer.