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Unconscionable Conduct: ASIC v Kobelt

In general, unconscionable conduct is conduct that is harsh, unfair or oppressive. It must not merely be unfair conduct but something that would go against a normal person’s conscience. Unconscionable conduct sometimes takes advantage of someone who is in a vulnerable position to gain an advantage.

Over time courts have been defining this legal concept. Several pieces of legislation make unconscionable conduct illegal in the context of business dealings or the sale of goods and services. One such piece of legislation is the Australian Securities and Investments Commission Act 2001. Section 12CB(1) of that Act makes it illegal to engage in conduct that is unconscionable in connection with financial services

The High Court of Australia considered the meaning of unconscionable conduct, under section 12CB(1) of the Australian Securities and Investments Commission Act 2001 in the case of the Australian Securities and Investments Commission (ASIC) v Kobelt [2019] HCA 18.

ASIC v Kobelt

Mr Kobelt was an operator of a store in Mintabie, South Australia. This store sold many things, including groceries, fuel and second-hand cars. The majority of Mr Kobelt’s customers were Indigenous Australians. Mr Kobelt had a unique way of allowing his customers to pay for goods and services purchased at the store, known as a “book-up” system. Mr Kobelt allowed his customers to defer payment and took possession of the keycards and PINs for the accounts where Centrelink payments or wages were deposited. He would then take money from these accounts when his customers told him that money would be deposited until their debts were paid off. If the customers were leaving the area, they could take their keycards with them on the condition that they would return them to Mr Kobalt when they came back.

Mr Kobelt did not take proper records of the amounts owed to him by his customers. The book-up system was mostly used for buying second-hand cars. Sometimes customers could not purchase groceries as Mr Kobelt had withdrawn all the money from their accounts. However, if this were the case, Mr Kobelt would allow customers to buy groceries from a portion of the amount he had withdrawn for that month. This meant that his customers were basically restricted to purchasing groceries from his store.

Decisions in the Federal Court and Full Federal Court

The case first went to the Federal Court and then the Full Federal Court. In the Federal Court, ASIC argued that Mr Kobelt’s behaviour was unconscionable on a systematic basis due to his taking advantage of his customers, who were vulnerable due to having poor financial literacy and being impoverished. ASIC also made similar arguments about a selection of specific customers.

The Federal Court held that Mr Kobelt’s conduct was unconscionable, but this decision was overturned on appeal. On appeal, the Full Court of the Federal Court acknowledged that Mr Kobelt’s customers were vulnerable. However, Mr Kobelt’s customers understood the book-up system and voluntarily accepted the arrangement. The Full Federal Court held that Mr Kobelt’s actions were not dishonest. The matter then proceeded to the High Court following a further appeal from ASIC.

Majority Judgement in the High Court

The majority of the High Court found that Mr Kobelt’s actions did not amount to unconscionable conduct. Two of the judges, Kiefel CJ and Bell J, who made this finding, pointed to the lack of advantage that Mr Kobelt gained due to the book-up arrangement. These judges also noted that the customers of Mr Kobelt were not disadvantaged to the extent that they could not determine whether the book-up system was in their interests. Mr Kobelt’s customers benefited from the arrangement, and through the system, they could avoid sharing resources with family members, which is common in indigenous communities.

Another judge who agreed with the majority, Gageler J, noted that Mr Kobelt was not acting in bad faith and negotiated with customers when they needed to purchase groceries. Keane J also agreed that the conduct was not unconscionable. The customers could have caused significant financial damage to Mr Kobelt’s business if they wanted to. They could have received worse financial arrangements if they had gone somewhere else.

Minority Judgement in the High Court

The three judges that dissented were Nettle J, Gordon J and Edelman J. The reasons these judges gave for their dissent were:

  • That Mr Kobelt had taken advantage of his customers by taking all their money, charging them a high-interest rate, failing to keep proper records and essentially requiring them to only shop at his store;
  • The customers were at a special disadvantage as they were uneducated, poor, lived in a remote community and had poor financial literacy; and
  • The risks of the book-up system were not adequately disclosed, and there was little transparency.

If you require legal advice or representation in any legal matter please contact Armstrong Legal. 

Kathryn Sampias

This article was written by Kathryn Sampias

Kathryn Sampias has a Bachelor of Laws, a Bachelor of Arts and a Graduate Diploma in Journalism. Kathryn was admitted to practice in 2005 and practised law for more than eight years, working both in private practice (mainly in defence litigation for professional indemnity disputes) and in the public service for the Australian Securities and Investments Commission (ASIC) in enforcement.

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