High Court of Australia rules on Corporate Systems Unconscionability and Director's Accessorial Liability
22 August 2024
The High Court has found a company liable for unconscionability based on changes made to the company’s systems controls and an individual CEO liable for being knowingly concerned in the company’s contravention.
Who does this decision impact?
This is an important decision[1] for companies doing business in Australia with customer-facing systems and processes, and their directors or senior managers.
Key takeaways
- A company may be liable for unconscionability under s 21 of the Australian Consumer Law (ACL) where its systems are set up in a way that creates a foreseeable risk of consequences occurring that will cause consumer harm. This includes removing systems controls or safeguards that are in place to ameliorate known risks.
- Where a company’s system is geared to achieve profit maximisation that exploits customers or is adverse to, or at the expense of, customers’ interests, this may amount to unconscionable conduct.
- Whether a company intends for a particular risk to eventuate is irrelevant where the system is set up (or updated) in a way which creates a foreseeable risk and where that risk eventuates. A company’s actions or intentions can be inferred based on its systems.
- Individuals (including directors or senior managers) can be liable as accessories for being knowingly concerned in a company’s contravention where the person knows of the essential facts or circumstances which made the company’s conduct unconscionable. They do not need to have known the company’s conduct was unconscionable.
What are the relevant facts?
Productivity Partners Pty Ltd trading as Captain Cook College (the College) was an online vocational education and training (VET) provider. The individual director respondent was the CEO of a company that acquired the College in 2014, and was the acting CEO of the College between November 2015 to January 2016.
The College had a business model that strongly incentivised agents to recruit students and ensure they remained enrolled past their first ‘census date’ (upon which the student would incur a debt to the Commonwealth for their VET fees plus a 20% loan fee (VFH debt)). This business model compounded the risks known to be inherent in the VFH scheme because (a) agents might pursue commission revenue in an unethical manner, by recruiting people who were unsuitable to undertake the online courses or engage in misleading conduct about students’ financial obligations; and (b) the College had no face to face contact with students, to guard against the risk of students being misled or unsuitably enrolled.
The College had the following systems controls in place to ameliorate these known risks:
- A quality assurance call would be made 48 hours after a student had enrolled to confirm they understood their financial commitments and that they were suitable for enrolment. This call was undertaken by an admissions officer at the College (i.e. not the agent).
- A student’s online attendance would be monitored in the first weeks of study after enrolment. If the student was not engaged online and remained uncontactable, their enrolment would be withdrawn before the first census date.
Following a decline in the number of enrolments, the College removed these two systems controls. The impact of these changes on both enrolment numbers and on the number of unsuitable students found to be enrolled, was dramatic and rapid.
The Australian Competition and Consumer Commission (the ACCC) commenced proceedings in November 2018, alleging that from 7 September 2015, the College had engaged in a system of conduct, or a pattern of behaviour, in respect of the students enrolled in the College’s online courses that was unconscionable under s 21 of the Australian Consumer Law (ACL). The impugned conduct related to the College’s removal of the two systems controls.
The ACCC further alleged that the CEO was knowingly concerned in the College’s contravention of s 21 of the ACL. The ACCC sought penalties against the CEO personally under s 224(1)(e) of the ACL, which allows penalties to be imposed on a person who “has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of such a provision”.
The ACCC was successful in proceedings at first instance and on appeal to the Full Court of the Federal Court of Australia. The College and the CEO appealed to the High Court of Australia.
What was the outcome?
The High Court unanimously found that the College had engaged in unconscionable conduct and that the CEO was liable as an accessory for this contravention. The High Court made the following relevant findings:
Corporate Systems Unconscionability
- By removing the two systems controls which were there to ameliorate known risks (in this case, the exploitation of students) for the purpose of increasing the College’s profit, the College acted unconscionably within the meaning of s 21 of the ACL.
- The College’s intention could be inferred from its design of the system. It was not necessary to establish that any individual person had chosen agent misconduct or unsuitable enrolments as a means of maximising profit. It was enough the College had employed a system which adopted, as its means to increased profitability, an increase in unsuitably enrolled students or students whose enrolment was the subject of agent misconduct.
- The College did not need to have intended for these risks to eventuate. For the purpose of determining whether conduct is unconscionable, regard can be had to circumstances that were reasonably foreseeable at the time of the conduct. In this case, the increased risk of misconduct being undetected that was reasonably foreseeable at the time of the relevant conduct was relevant to considering whether the conduct was unconscionable, without the need for the company to have intended that the misconduct occur.
Accessorial Liability
- In order to establish a person was “knowingly concerned” in a company’s contravention of s 21 of the ACL:
- it is sufficient the person knew of the facts and circumstances which made the company’s conduct unconscionable
- it is unnecessary to prove the person subjectively determined that the company’s conduct was “unconscionable” or against conscience.
- The CEO had been found by the primary judge to be a key driver of the changes to the College’s enrolment and withdrawal processes because of the College’s worsening financial position, even though he may not have known of the operation and effect of the two system controls with precision.
- Based on the matters (including the risks) known to the CEO and his involvement in the removal of the two systems controls, the CEO was found to have intended to participate in the essential conduct that was the unconscionable conduct of the College. The CEO was therefore found to have been knowingly involved in the College’s unconscionable conduct, and liable as an accessory to the contravention.
The matter will now return to the Federal Court for final orders to be made, including penalties.
Takeaways
For Companies
Most customer-facing Australian businesses rely on sets of systems and processes, including (increasingly) digital customer-facing platforms and AI-powered chatbots, to sell products or services and provide customer services. This decision confirms that a company can be treated as having acted, and as having intentions, based on the design of its systems.
While there is nothing inherently wrong with a system being designed with the goal of increasing a company’s profits, it is important systems are not designed (or updated/changed) in a way which creates a risk of exploiting customers or that is adverse to customers’ interests or may otherwise be unconscionable. To ensure compliance, companies should:
- Carry out regular testing, risk assessments and audits of their systems and processes (from beginning to end), identifying risks and vulnerabilities and ensure appropriate systems controls are in place to address known risks. In larger organisations, it is important that this process involves representatives from relevant business lines and internal departments (including legal, compliance, operations and/or risk).
- Ensure that appropriate safeguards are in place to prevent systems controls or safeguards being removed without the implications of such changes being properly tested and authorised by the company.
Companies can face significant penalties for acting unconscionably. In July 2023, a former vocational college was fined AU$438M in penalties for acting unconscionably and for misleading students.
For Directors and Senior Managers
Directors and senior managers need to be aware of the risk of being held personally liable as an accessory where they are aware of, and intentionally participate in, essential matters which amount to unconscionable conduct (or other contraventions) by the company. They do not need to have known or intended that the company’s conduct was unconscionable – it is enough that they intended to participate in the essential conduct that amounted to unconscionable conduct.
Individuals can have significant penalties (and awards of damages) imposed on them personally for accessorial liability.
For Insurers
Insurers should be aware of the increased significant penalties which can be awarded against companies for breaches of Australian consumer laws including for unconscionable conduct, and against individual D&Os where they are found to have accessorial liability for a company’s contravention.
Depending on the policy wording and circumstances of any claim, there may be cover for directors and officers and companies for legal costs and even fines and penalties under some insurance policies. However, the ultimate findings made by a Court may enliven exclusions under insurance policies and/or prohibitions on indemnities under Australian laws (which can apply to company and insurer indemnities).
[1] Productivity Partners Pty Ltd v Australian Competition and Consumer Commission Wills v Australian Competition and Consumer Commission [2024] HCA 27
