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Misuse of Market Power
&
Unconscionable ConductFiona Crosbie & Bashi Kumar
Allens Arthur Robinson
27 February 2003
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Misuse of Market Power
&
Unconscionable Conduct
Fiona Crosbie & Bashi Kumar
Allens Arthur Robinson
27 February 2003
"Competition, by its very nature, is deliberate and ruthless."[Mason CJ & Wilson J, Queensland Wire]
When, and in what circumstances, will a company misuse either its market power in contravention
of section 46 of the Trade Practices Act 1974 (TPA) or its superior bargaining power in
contravention of the unconscionable conduct provisions of the TPA? While the ACCC bemoans
what it sees as judicial emasculation of section 46, some commentators have argued that the
unconscionable conduct provisions should step in to deal with misuses of market power involving
small businesses.
The effectiveness of section 46 was hotly debated before the Inquiry into the TPA, chaired by
former High Court Justice Darryl Dawson last year (Dawson Inquiry) and promises to feature in
the report that will issue.
This paper reviews the current state of the law on both section 46 and the unconscionable conduct
provisions. In particular, we address the following:
1. Misuse of market power under section 46 of the TPA:
• what is market power?
• when or in what circumstances will a company misuse its market power?
• the implications of recent decisions such as Boral and Melway.
2. Unconscionable conduct under sections 51AA and 51AC of the TPA:
• what is it and where are the provisions headed?
3. The Dawson Inquiry and what to expect from it.
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1. Section 46 of the TPA: when is a corporation misusing market power?
1.1 THE LEGISLATION
Section 46(1) provides:
“(1) A corporation that has substantial degree of power in a market shall not take
advantage of that power for the purpose of:
(a) eliminating or substantially damaging a competitor of the corporation or of a body
corporate that is related to the corporation in that or any other market; or
(b) preventing the entry of a person into that or any other market; or
(c) deterring or preventing a person from engaging in competitive conduct in that or
any other market.”
1.2 OVERVIEW OF LEGISLATIVE REQUIREMENTS
To put it simply, a corporation will breach section 46 of the Act if it:
• has a substantial degree of power in a market;
• takes advantage of that market power; and
• does so for a prohibited purpose.
Note that section 46 only applies to the conduct of a corporation or, a corporation and its
related entities.
1.3 MARKET DEFINITION
To determine whether a corporation has a substantial degree of market power, the market
must first be defined. Once the outer boundaries of a market are delineated, a company's
power within that market may be ascertained.
As highlighted by McHugh J in Boral Besser Masonry Limited v ACCC (Boral)1:
“There is an inverse relationship between market definition and market
power. If the relevant market is defined widely, it will ordinarily result in a
finding that a firm has less market power than if the market is defined
narrowly”
Not surprisingly, market definition is rigorously disputed in court.
(a) DEFINING THE MARKET
A market is delineated by reference to product, geographic and functional dimensions.
Starting with the goods and services of the corporation whose conduct is under scrutiny, a
court will then determine the degree of demand and supply side substitution to determine
the relevant market.2 The High Court in Queensland Wire Industries Pty Ltd v Broken Hill
1 [2003] HCA 5 at [255].
2 See, for instance, Re QCMA and Defiance Holdings (1976) 25 FLR 169 at 190; see also Re Tooth & Co Ltd; Re TooheysLtd (1979) ATPR 40-113; Arnotts Ltd v TPC (1990) ATPR 41-061.
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Co Ltd3 (Queensland Wire) confirmed that the market was appropriately defined as the
area of close competition, determined by the substitutability of goods both on the supplyand demand side.
Ø Boral Besser Masonry Limited v ACCC4
Facts
The Boral case provides an example on point. The ACCC claimed that between April 1994
and October 1996, BBM, a wholly owned subsidiary of Boral Ltd, had taken advantage of
its market power in the market for concrete masonry products (CMP) in the Melbourne
metropolitan area. During the relevant time, there was excess capacity in the CMP
industry and a price war arose between the major players, Boral, Rocla and Pioneer. Boral
also made attempts to increase its capacity by offering to purchase the highly efficient
“Hess” plant of one of its competitors (this never eventuated) and by upgrading its Deer
Park facilities.
Federal Court
At first instance, Heerey J found that the relevant market was the market for materials used
in the construction of walls and paving in the Melbourne metropolitan area. 5 Heerey J
considered there was sufficient evidence of actual and potential substitution between CMP
and alternative products such as tilt-up, clay brick and plasterboard. 6 It followed that BBM
did not have market power. 7
Full Federal Court
On appeal, the Full Federal Court overturned the decision of Heerey J, concluding instead
that the relevant market was the narrower market for the supply of CMP, in which BBM had
substantial market power. 8 Justice Beaumont concluded that although there was some
substitution between CMP and alternative products, it was ”not sufficiently intense, or long-
lasting, to warrant the description “close”".9 Justice Beaumont also thought it was
significant that internal documents showed that BBM treated the relevant market as themarket for the supply of CMP.10
3 (1989) 167 CLR 177.
4 [2003] HCA 5 at [255].
5 Boral, [2003] HCA 5 at [101-102] (Gleeson CJ & Callinan J).
6 Ibid.
7 Boral, [2003] HCA 5 at 103 (Gleeson CJ & Callinan J).
8 Australian Competition and Consumer Commission v Boral (2002) 106 FCR 328 (ACCC v Boral) at 377-378 (BeaumontJ), 384 (Merkel J) and 410 (Finkelstein J).
9 ACCC v Boral , (2002) 106 FCR 328 at 377-378 (Beaumont J).
10 Ibid.
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High Court
On appeal, the High Court accepted the Full Federal Court's market definition. 11 McHugh J
defined the market as12:
“the area of actual and potential, and not purely theoretical, interaction
between producers and consumers where given the right incentive – a
change in price or terms of sale – substitution will occur.”
Interestingly, despite the narrower market, the majority of the High Court concluded that
Boral did not have substantial market power. Justice Kirby dissented. This will be
discussed further below.
1.4 SUBSTANTIAL DEGREE OF MARKET POWER
Having defined the market, it is necessary to consider whether a person has a substantial
degree of power in that market.
(a) WHAT IS MARKET POWER?
Section 46(3) of the TPA defines market power as essentially the ability to behave in a
manner unconstrained by competitors in a market. Mason CJ and Wilson J said in
Queensland Wire13:
“Market power can be defined as the ability of a firm to raise prices abovethe supply cost without rivals taking away customers in due time, supply
cost being the minimum cost an efficient firm would incur in producing the
product.…”
Ø Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (Melway)14
In Melway, the High Court confirmed this definition of market power.
Facts
Melway concerned Melway Publishing's refusal to supply Auto Fashions Australia with its
directories. Melway Publishing had 80-90 percent of the wholesale street directory market
in Melbourne. Auto Fashions claimed that Melway Publishing misused its market power bymaintaining a policy of exclusive distribution whereby wholesalers could only sell to
particular segments of the retail market. Melway Publishing did this to prevent Auto
Fashions from competing in the downstream market for the retail supply of street
directories.
11 Boral, [2003] HCA 5 at [134] (Gleeson CJ & Callinan J), 155 (Gaudron, Gummow & Hayne JJ), 259 (McHugh J) and 330(Kirby J).
12 Boral, [2003] HCA 5 at [252].
13 Queensland Wire, (1989) 167 CLR 177 at 188.
14 (2001) 205 CLR 1 at 17.
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Full Federal Court
The Full Federal Court held that Melway Publishing had market power after comparing
Melway Publishing's conduct with the way it would have behaved in a market without a
substantial degree of market power.
High Court
Although the High Court agreed that the Melway Publishing had market power15, the
majority criticised the Full Federal Court's reasoning in respect to market power. 16 The
majority of the High Court endorsed the approach taken in Queensland Wire and stated:
“…market power means the capacity to behave in a certain way (which
might include setting prices, granting or refusing to supply, arranging
systems of distribution), persistently, free from the constraints of
competition.”17
(b) THE SIGNIFICANCE OF MARKET SHARES
It was thought that a high market share was a significant indicator of the existence of a
substantial degree of market power. This, combined with countervailing factors such as
low barriers to entry or the threat of imports, formed the basis of an assessment for the
determining market power. Increasingly, however, a low market share is not necessarilyindicative of the absence of market power.
Ø Boral Besser Masonry Limited v ACCC18
In Boral, much attention was devoted to establishing whether Boral had substantial market
power, despite its relatively low or fluctuating market share ranging between 18 – 33percent.
Full Federal Court
The Full Federal Court formed the view that the behaviour of Boral was evidence of market
power, having regard to the following:
• Boral’s market reputation as a source of market power19;
• Boral’s financial resources (or deep pockets) which enabled it to maintain prices atbelow marginal cost for a long period of time20; and
• dynamic or strategic barriers to entry.21
15 Melway, (2001) 205 CLR 1 at 20.
16 Melway, (2001) 205 CLR 1 at 24.
17 Melway, (2001) 205 CLR 1 at 27.
18 [2003] HCA 5.
19 ACCC v Boral , (2002) 106 FCR 328 at 378 (Beaumont J).
20 ACCC v Boral , (2002) 106 FCR 328 at 389-390 (Merkel J).
21 ACCC v Boral , (2002) 106 FCR 328 at 389 (Merkel J) and 415 (Finkelstein J).
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High Court
The majority of the High Court, however, came to a different conclusion. Gleeson CJ and
Callinan J were of the opinion that the Full Federal Court had confused financial strength
with market power and stated:
“The financial ability to survive a price war is not market power, or a
manifestation of characteristics that give marker power, if, when the price
war is over, the market is still highly competitive.”22
McHugh J concluded that Boral did not have a substantial degree of market power as:
• it was unable to raise prices to supra-competitive levels without losing customers;
and
• it was not in a position to recoup its losses once the price cutting had ended. 23
Ø ACCC v Universal Music Australia Pty Ltd24
In Universal Music, an important issue was whether the respondents had a substantial
degree of market power, notwithstanding their modest market shares.
Hill J stated:
“The case of a firm operating in an oligopolistic market with only 15%
market share and unable to fix prices in the overall market above the
competitive level but which has, as a result of a temporary monopoly power
over a limited number of products in that market, substantial power to
exclude competitor is not one which has been the subject of any authority
in Australia…”25
However, Hill J adopted what he considered to be a common sense approach to the
definition of market power and concluded that despite the limited market share of the
respondents, they had market power because:
• there were barriers to entry in the statutory requirement of copyright proof prior toparallel importation and the behaviour of incumbent firms; and
• many retailers would be unable to ignore the threat to refuse to supply from some ofthe major record companies because of the significance of chart music in the market.26
Universal Music has been appealed to the Full Federal Court. It will be very interesting to
see what impact the views of the majority of the High Court in Boral will have on the
Universal Music appeal having regard to the fact that market players in Boral had greater
percentage market shares than the market players in Universal Music.
22 Boral, [2003] HCA 5 at [138].
23 Boral, [2003] HCA 5 at [199].
24 (2001) 115 FCR 442.
25 Universal , (2001) 115 FCR 442 at 539-540.
26 Universal , (2001) 115 FCR 442 at 541-542.
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Ø ACCC v Australian Safeway Stores Pty Ltd (No 2)27
In Safeway, Safeway Stores only had a total market share of 16 percent in the market for
the wholesale acquisition of bread in Victoria. Goldberg J, however, concluded that
Safeway Stores had a substantial degree of market power because there were no
competitive constraints on Safeway Stores at the wholesale level.28 This was because:
• there were no alternative purchasers to whom the bakers could supply the breadrefused by Safeway Stores, and all three plant bakers had excess capacity;
• Safeway Stores had the ability to determine the terms of trade as well as the price;
• the distinct lack of product differentiation between the different bakers, all genericproducts being almost perfectly substitutable for Safeway Stores; and
• there were substantial strategic barriers to entry given that Safeway Stores would onlybe constrained by a competitor of a comparable size.
1.5 TAKING ADVANTAGE OF MARKET POWER
Corporations with a substantial degree of market power will only breach section 46 if they
take advantage of that market power for a proscribed purpose. The concept of "taking
advantage" is therefore extremely important. Of significance is whether there may becommercially rational or efficient explanations for the conduct that is said to constitute a
taking advantage of market power.
(a) WHAT IS "TAKING ADVANTAGE"?
The High Court in Queensland Wire clarified that to ‘take advantage’ means to ‘use’; aphrase devoid of moral or pejorative connotations.29 Mason CJ and Wilson J held that the
relevant question is whether BHP could have engaged in the conduct in a competitive
market.30 As almost anything could be done in either a competitive or non-competitive
environment, the view of Mason CJ and Wilson J makes satisfaction of the ‘take
advantage’ requirement a fait accompli. However, the preferred analysis of Deane,
Dawson & Toohey JJ was to apply the hypothetical question of what BHP would do in
order to compete more effectively in the long run. This test would more appropriately
require an examination of what a profit maximising company would actually do having
regard to potential efficiency gains from the conduct.
Ø Queensland Wire Industries Pty Ltd v Broken Hill Co Ltd31
Facts
In Queensland Wire, BHP constructively refused to supply Y-bar (an input into the
manufacture of star-picket fences) to Queensland Wire Industries (QWI). QWI alleged that
BHP took advantage of its market power in contravention of section 46.
27 [2001] FCA 1861.
28 Safeway [2001] FCA 1861 at [1100].
29 Queensland Wire (1989) 167 CLR 177 at 192.
30 Ibid.
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High Court
The High Court agreed, holding that BHP was able to refuse to supply Y-bar because of its
market power, doing so in order to prevent QWI from competing in the downstream rural
fencing market.
Ø Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (Melway)32
In Melway, the High Court confirmed the approach taken in Queensland Wire and stated
that:
“the expression “take advantage of” does not mean anything materially
different from “use”, and does not require conduct which is predatory or
morally blameworthy”.33
The question therefore becomes whether a company with market power would have
behaved in the same way without market power.34
The majority of the High Court found that on the balance of probabilities, Melway
Publishing would have denied supply even without market power. They gave the following
reasons for this finding:
• on the evidence, it did not appear that Melway Publishing would lose sales fromthe refusal to supply, as Auto Fashions was proposing to compete with existing
wholesale distributors;
• in a competitive market, a manufacturer does not necessarily increase total sales
by selling to everyone who seeks wholesale supply; and
• supplying the respondent would effectively amount to abandonment of Melway
Publishing’s exclusive distribution arrangement which it had successfully adopted
to secure a position of market dominance.
(b) THE NEXUS BETWEEN MARKET POWER AND "TAKING ADVANTAGE"
The High Court in Melway said that:
“...the Act requires, not merely the co-existence of market power, conduct ,
and proscribed purpose, but a connection such that the firm whose conduct
is in question can be said to be taking advantage of its power.”35
The High Court in Melway agreed that freedom from competitive constraint might make it
possible or easier for a corporation to refuse supply. However, it does not follow that a
company with freedom from competitive constraint which refuses to supply is displaying
connection between the freedom from competitive constraint (ie market power) and the
refusal to supply (taking advantage). The presence of competitive constraints might still in
31 (1989) 167 CLR 177.
32 (2001) 205 CLR 1 at 17.
33 Melway (2001) 205 CLR 1 at 17.
34 Melway (2001) 205 CLR 1 at 21.
35 Ibid.
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such circumstances be compatible with a similar refusal, especially if done to secure
business advantages which would normally exist in a competitive environment.36
Ø ACCC v Australian Safeway Stores Pty Ltd (No 2)37
Goldberg J sought to apply Melway to the circumstances in Safeway. Goldberg J said that
the appropriate test was whether Safeway Stores could have behaved in the same way in
a competitive environment.
Safeway Stores adopted and implemented a bread policy of deleting bread lines of bakers
which supplied bread to the company at prices higher than to Safeway Stores' competitors.
His Honour came to the conclusion that even if Safeway did not have market power, it
would have adopted and implemented its policy.38 He said that even in a competitive
market there would be no commercial imperative for Safeway to act any differently
because:
• the bakers would still wish to supply bread to Safeway;
• Safeway would still be able to substitute the products of one baker with another bakergiven the excess number of suppliers in the market; and
• Safeway would still have implemented the Policy even if the Policy did not have thedesired effect.
Safeway illustrates the difficulty in applying a counter factual in the absence of relevant
antecedent conduct. In Melway, the Court had the benefit of knowing the situation before
Melway Publishing obtained market power – Melway Publishing used a particular
distribution system to grow from a small business to a significant market player in
Melbourne. It was therefore an easy comparison to make. In Safeway, however, that
comparison was not available, so the Court was left to speculate how Safeway would have
acted without its market power.
Ø Boral Besser Masonry Limited v ACCC39
Full Federal Court
In Boral, the Full Federal Court used Boral's conduct as evidence of both the taking
advantage limb and the market power limb. In doing so, the Court relied more on the
behaviour of market participants rather than the structure of the market to arrive at a
conclusion that market power exists.
High Court
On appeal, a majority of the High Court found that the Full Federal Court had inverted the
reasoning process by considering first the purpose of the conduct, and then the existence
of substantial market power. 40 The Full Federal Court was criticised for unduly
36 Melway (2001) 205 CLR 1 at 27-28.
37 [2001] FCA 1861.
38 Safeway [2001] FCA 1861.
39 [2003] HCA 5.
40 Boral, [2003] HCA 5 at [194] (Gaudron, Gummow & Hayne JJ) and [320] (McHugh J).
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concentrating on Boral's desire to hold or increase its market share41 and the “supply side”
of the market 42. The High Court held that it was important to “take account of the dynamicsresulting from the powerful position in which customers for CMP found themselves, partly
in consequence of the availability of substitute products”43 and to consider Boral's long term
prospects for raising prices to a supra–competitive level in order to recoup its losses.44
Kirby J (dissent)
However, in his dissenting judgment, Kirby J held that the ideas of “corporation”, “market”,“taking advantage”, “power” and “purpose” were interrelated. 45 His Honour said that
commonsense dictated the fact that power would be linked to purpose and the evidence in
the present case supported the conclusion that Boral had a proscribed purpose. 46 His
Honour went into considerable discussion about the concept of “recoupment” and
concluded that, given the wording of section 46, it was not necessary to establish
recoupment as an element of the impugned conduct.47 His Honour concluded that Boral’s
conduct was precisely the type of conduct that section 46 forbade and that the appeal
should be dismissed. 48
(c) THE SIGNIFICANCE OF FINANCIAL RESOURCES
As discussed above, the Full Federal Court in Boral held that Boral's wholly owned
subsidiary could supply concrete masonry products at extremely low prices because of
Boral's financial strength or deep pockets. Therefore, it was neither necessary nor likely
that the subsidiary would look to recoup its losses. The majority in the High Court
disagreed.
Ø Rural Press Ltd v ACCC (Rural Press) 49
Interestingly, the Full Federal Court took an approach to the issue of financial resources in
Rural Press that was different to its previous approach in Boral. The change in approach
may have been due to the High Court's guidance in Melway, which was handed down just
a few days after the Full Federal Court's decision in Boral.
Facts
Rural Press concerned the pressure exerted by Bridge Printing and Rural Press, the
publishers of the Murray Valley Standard (together, the publishers), on Waikerie Printing
which owned The River News, to keep to their respective territories.
41 Boral, [2003] HCA 5 at [263] (McHugh J).
42 Boral, [2003] HCA 5 at [60] (Gleeson CJ & Callinan J).
43 Ibid.
44 Boral, [2003] HCA 5 at [128-130] (Gleeson CJ & Callinan J).
45 Boral, [2003] HCA 5 at para [378].
46 Boral, [2003] HCA 5 at [389].
47 Boral, [2003] HCA 5 at [436].
48 Boral, [2003] HCA 5 at [448-449].
49 [2002] FCAFC 213 (Whitlam, Sackville & Gyles JJ).
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Federal Court
At first instance, Justice Mansfield upheld the ACCC’s allegations that the publishers had
misused their market power in the market for regional newspapers in Murray Bridge. His
Honour found that financial resources, existing publishing resources and expertise were
relevant to the measurement of market power. 50
Full Federal Court
On appeal, the Full Federal Court held that the publishers had not taken advantage of their
market power. The Court held that, with financial resources and excess capacity, the
publishers could have entered the Riverland market regardless of their market power in the
Murray Bridge market.51 As such, while the existence of financial resources could have
facilitated the use of market power, it did not constitute a use of market power and
therefore, was not a breach of section 46.52
It will be interesting to see whether this finding leads to a grant of special leave to appeal to
the High Court.
(d) MARKET POWER V OTHER POWER
Ø Stirling Harbour Services Pty Ltd v Bunbury Port Authority53 (Stirling Harbour)
In Stirling Harbour, the Full Federal Court distinguished market power from statutory
power.
Facts
The Bunbury Port Authority (BPA) exclusively provided port facilities and services in the
Port of Bunbury under the Port Authorities Act 1999 WA. In 1999, BPA called for tenders
for the grant of an exclusive licence for a five to seven year term to provide towage
services to shipping operators using the port. Stirling Marine Services (SMS), who had up
to this point been the sole provider of towage services at the Port under a non-exclusive
licence granted by BPA, alleged that BPA was using its market power to exclude SMS by
granting an exclusive licence to a competitor.
Federal Court
Justice French at first instance distinguished between statutory power and market power,
stating that:
“the exercise by [BPA] of a statutory power to licence the provision of
towage services in the Port of Bunbury is not an exercise of market powerbut rather the discharge of a regulatory function conferred upon it by the
legislature in the public interest”.54
50 Rural Press [2002] FCAFC 213 at [64-68].
51 Rural Press [2002] FCAFC 213 at [142].
52 Rural Press [2002] FCAFC 213 at [143].
53 [2000] FCA 1381.
54 Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 38 at [124] (French J).
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The Full Federal Court agreed with his Honour's approach. 55
Ø NT Power Generation Pty Ltd v Power & Water Authority56
In this case, however, Mansfield J came to a different view. His Honour held that Power &
Water Authority (PAWA) had taken advantage of its market power by refusing to provide
access to PAWA’s infrastructure, thereby preventing NT Power from selling electricity to
persons in the Northern Territory. Mansfield J held that PAWA’s market power stemmed
from its natural monopoly in infrastructure. His Honour stated further that:
[the decision]”…was made in the appreciation of the existence of that market
power, and of the capacity to exercise that market power to decline access to its
infrastructure. It was only by virtue of its control of the Market, and the absence of
other suppliers in the market, that PAWA could in a commercial sense withhold
access to its infrastructure.”57
This case is also subject to an application for a special leave to appeal before the High
Court.
1.6 FOR A PROHIBITED PURPOSE
Section 46 will only be breached if the business has used its market power for a proscribed
purpose.
Where there are multiple purposes, a court will look at the corporation's substantial
purpose for engaging in the conduct. If the substantial purpose is anti-competitive, it will be
sufficient to contravene section 46, irrespective of the existence of other substantial
purposes.58
(a) PURPOSE: SUBJECTIVE OR OBJECTIVE?
To establish purpose, the courts will look first at the subjective purpose of the corporation. 59
However, objective elements are also relevant to establishing subjective purpose. Section
46(7) of the TPA specifies that purpose must be established by direct evidence, or by
inference. In General Newspapers Pty Ltd v Telstra (1993) ATPR 41-274, the Courtstated that purpose will usually be inferred from the nature of the arrangement, the
circumstances in which it was made and its likely effect. The best evidence from a practical
perspective, however, is likely to come from pre-existing company documents or
statements from the witness box.
In Boral, for instance, purpose was easily inferred from Boral's internal memoranda and
company minutes which Finkelstein J aptly described on appeal as ‘smoking gun’
documents. The documents were said to contain details of Boral's business strategy,
including its stated goal to further reduce the number of manufacturers in the market.
55 Stirling Harbour [2000] FCA 1381 at [71-72] (Burchett & Hely JJ).
56 [2001] FCA 334.
57 Ibid at [357].
58 See Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd (1987) 75 ALR 581.
59 Dowling v Dalgety Australia Ltd (1992) 106 ALR 75.
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(b) PURPOSE IS ABOUT INTENTIONS, NOT OUTCOMES
As both a question of law and evidence, it is not necessary to show that the purpose was
achieved, provided purpose is established as a question of fact.60 In other words, section
46 is concerned with the intention to achieve a result, not the actual result.
Melway highlights this point. The adoption of a territorially cordoned distributor
arrangement may have the effect of excluding a company in a downstream market but it
does not necessarily have the requisite purpose. As the High Court said, the adoption of adistribution system by a manufacturer which imposes vertical restraints on wholesalers
does not necessarily contravene section 46 as it is just as likely to have been adopted for
pro-competitive purposes.61
(c) RATIONAL OR LEGITIMATE BUSINESS REASONS
Ø Boral Besser Masonry Limited v ACCC62
The High Court in Boral cautioned against proceeding too quickly from a finding about
purpose to a conclusion about taking advantage of market power.63 McHugh J described
the Full Federal Court's approach as “inverted” – the Court started with Boral's stated
purpose to eliminate its competitors, and subsequently viewed its conduct as coloured by
that purpose. 64
Gleeson CJ and Callinan J stated that the concept of “hanging on” in the expectation that
one or more suppliers would “break first” may have been a rational commercial response,
rather than evidence of a purpose to damage or eliminate competitors. In the light of the
fiercely competitive market in which it was operating, Boral's pricing decisions and decision
to upgrade its facilities was completely rational.65
(d) NEXUS BETWEEN PROSCRIBED PURPOSE AND MARKET POWER
Implicit in the above mentioned reasoning is the need to show a causative link between the
proscribed purpose and the exercise of market power. A business will not have a
proscribed purpose if it undertakes conduct with a legitimate purpose, irrespective of
whether the conduct has the effect of damaging a competitor.
Ø Plume v Federal Airports Corp; Habib v Plume v Anor (Plume)66
For example, in Plume, the Federal Airports Corp (FAC) denied Plume the right to operate
a passenger bus service between Alice Springs Airport and the city centre by granting an
exclusive shuttle bus operating licence to a competitor. The effect was to damage Plumes'
business. However, the Court found that the FAC's purpose was not to prevent Plume from
60 Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43.
61 Melway (2001) 205 CLR 1 at 18.
62 [2003] HCA 5.
63 Boral, [2003] HCA 5 at [123] (Gleeson CJ and Callinan J) and [181] (Gaudron, Gummow & Hayne JJ).
64 Boral, [2003] HCA 5 at [320] (McHugh J).
65 Boral, [2003] HCA 5 at [142] (Gleeson CJ and Callinan J).
66 (1997) ATPR 41-589.
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engaging in competitive conduct, but to ensure that a commercially viable, efficient shuttle
bus service was put in place for the benefit of the public.67
Ø Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (Melway)68
Similarly, in Melway, the majority of the High Court held that Melway Publishing had a
number of legitimate business reasons for maintaining its distribution system, only one of
which was to restrict competition between distributors downstream.69 This did not make a
finding of a prohibited purpose inevitable. The majority in Melway held that there was nosuggestion that Melway Publishing acted with the purpose of preventing the respondent
from becoming a wholesaler of street directories. Melway Publishing was not the only
possible source of Melbourne street directories. Although Melway Publishing was the only
source of its own street directories, this would have been the case regardless of its market
power. 70
2. Unconscionable conduct
2.1 EQUITABLE PRINCIPLES OF UNCONSCIONABILITY
Unconscionability is an equitable principle. It allows a transaction to be set aside where
one party to a transaction takes unfair advantage of another party that is under a specialdisability, where the disability was sufficiently evident that the stronger party knew or ought
to have known about it. These basic principles were set out by Deane J in Commercial
Bank of Australia v Amadio (1983) 151 CLR 447 where he stated:
The jurisdiction is long established as extending generally to circumstances in which:
(i) a party to a transaction was under a special disability in dealing with the other party with theconsequence that there was an absence of any reasonable degree of equality betweenthem; and
(ii) that disability was sufficiently evident to the stronger party to make it prima facie “unfair” or“unconscientious” that he procure, or accept, the weaker party’s assent to the impugned
transaction in the circumstances in which he procured or accepted it.71
2.2 THE LEGISLATION
The TPA now incorporates the following prohibitions on unconscionable conduct:
Ø a general prohibition, usually involving a party with a "special disability" (section 51AA)
Ø a prohibition relating to consumer transactions (section 51AB); and
Ø a prohibition relating to transactions involving small business (section 51AC).
67 Ibid at 44132.
68 (2001) 205 CLR 1 at 17.
69 Melway (2001) 205 CLR 1 at 20.
70 Melway (2001) 205 CLR 1 at 18.
71 (1983) 151 CLR 447 at 474
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As well as giving the ACCC power to prosecute unconscionable conduct, individuals can
now seek the remedies under the TPA in relation to claims of unconscionable conduct.
Sections 51AA and 51AC are discussed in detail below.
2.3 SECTION 51AA OF THE TPA
(a) GENERAL PROHIBITION: S51AA
Section 51AA provides that:
"A corporation must not, in trade or commerce, engage in conduct that is unconscionable
within the meaning of the unwritten law, from time to time, of the States or Territories."
Amadio is considered the ‘cornerstone’ of the "unwritten law" referred to in section 51AA.
Mason J defined unconscionable conduct in Amadio as:
“the class of case in which a party makes unconscientious use of his
superior position or bargaining power to the detriment of a party who
suffers from some special disability or is placed in some special situation of
disadvantage.”72
The Amadios were an elderly Italian couple who were persuaded by their son to provide a
mortgage guarantee on the son's business debt to the Commercial Bank of Australia. The
couple mistakenly believed that the business was financially sound, and that their liability
was limited. The business failed, and the bank sought to enforce the mortgage against the
Amadios' assets. In a majority decision, the High Court held that the bank knew or should
have known of the Amadios' special disability and taken care to disclose all the relevant
facts prior to obtaining the guarantee. The guarantee was set aside on the grounds that
the bank had acted unconscionably in its dealings with the Amadios.
(b) WHAT IS A SPECIAL DISABILITY?
The circumstances giving rise to a special disability at general law have generally been
construed as those of a personal nature, such as illness, illiteracy, impaired faculties and
ignorance.73 The ACCC has recently sought to extend the notion of special disability to
circumstances whereby one party suffers financial, or some other form of commercial,
dependence. The judicial responses to this have been mixed.
Ø ACCC v Berbatis Holdings Pty Ltd74 (Berbatis)
Facts
In an action against a landlord of a shopping centre in Perth, the ACCC alleged that thelandlord acted unconscionably towards small business tenants by imposing a condition that
the tenant would only secure a new lease if it ceased litigation concerning the existing
lease. The ACCC argued that the tenants were at a special disadvantage because of their
financial dependence on the renewal of the lease. In particular, the ACCC claimed that the
72 Ibid at 461.
73 See Blomley v Ryan (1956) 99 CLR 362 at 404 (Fullagar J).
74 [2001] FCA 757.
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landlord knew that the Roberts (a tenant) wanted to renew their lease and sell their
business so that they could care for a sick child.
Federal Court
At first instance, French J held that the landlord's conduct in relation to the Roberts was a
contravention of section 51AA. This was because the Roberts were under a "situational
disadvantage" in relation to the landlord, who was unfairly exploiting the Roberts' position
of vulnerability. The Court was also influenced by the fact that the litigation against thelandlord concerned some bona fide or serious claims.
Full Federal Court
In a unanimous judgment, the Full Federal Court described the Roberts' situation as
dependant on a renewal of its lease so as to be in a position to sell the business. This, the
Court said, was a similar situation to that which is experienced by any other proprietorwhose business goodwill was dependent on location. 75 In other words, there was nothing
special about the disadvantage. The Full Federal Court stressed the distinction between
acting opportunistically to strike a hard bargain, and acting unconscionably. In this case,
the landlord was acting opportunistically.76
The decision of the Full Federal Court is currently on appeal to the High Court. Gummow
and Kirby JJ indicated during the hearing that the questions on appeal before the Court
would also be considered under section 51AC. 77
(c) ACCC v Samton Holdings Pty Ltd78 (Samton Holdings)
In Samton Holdings , the Ranaldis purchased a business which included a lease of
premises owned by Samton. The lease was due to expire in a few months, but the
Ranaldis could exercise an option to renew the lease provided sufficient notice was given.
The Ranaldis failed to exercise the option in time. Samton indicated that it would renew
the lease if the Ranaldis paid them $70, 000. The ACCC argued that the Ranaldis were in
a position of “special disadvantage” because their financial security depended upon thebusiness, which in turn required an extension of the lease.
Federal Court
At first instance, the Court agreed that the Ranaldis were in a position of special
disadvantage, and that Samton was aware of this position. However, the Court held that
Samton was not unconscionable in its dealings with the Ranaldis because it was under noobligation to extend the lease.
On appeal, the Full Federal Court agreed that Samton's conduct was not unconscionable.
However, the Court disagreed with the conclusion that the Ranaldis were in a position of
special disadvantage.
75 Berbatis, note 74 at [75].
76 Berbatis, note 74 at [81].
77 ACCC v GC Berbatis Holdings Pty Ltd & Ors (21 October 2002), High Court Transcript.
78 (2002) 117 FCR 301.
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The Full Federal Court held that:
“Characterisation of disadvantage as ''special'' involves the recognition that
it would be unconscionable knowingly to deal with the person so affected
without regard to his or her disability, be it constitutional, in the sense of
inherent, or situational, in the sense of arising from a particular set of
circumstances.”79
The Court acknowledged that the Ranaldis lacked bargaining power. However, it did notfollow that the Randaldis were at a special disadvantage given that their present
circumstances were the result of: 80
• considered commercial judgment; and
• an oversight in neglecting to exercise the option in good time.
The Court stated:
“At least in the case of an experienced business person there must, in our
opinion, be something more than commercial vulnerability (however
extreme) to elevate disadvantage into special disadvantage."81
2.4 SECTION 51AC OF THE TPA
(a) THE SMALL BUSINESS PROVISION: SECTION 51AC
Section 51AC(1) provides:
“A corporation must not, in trade or commerce, in connection with:
(a) the supply or possibly supply of goods or services to a person (other than a listed
public company); or
(b) the acquisition or possible acquisition of goods or services from a person (other than a
listed public company);
engage in conduct that is, in all the circumstances, unconscionable.”
Section 51AC(1) deals with the supply to or acquisition of goods or services by acorporation to or from a person. Section 51AC(2) mirrors s51AC(1) in form but deals in
substance with the supply to or acquisition of goods and services to or from corporations
(other than listed public companies). Sections 51AC(3) and 51AC(4) describe the matters
to which a Court may have regard when supplying goods or services, such as the
following:
(a) the relative bargaining strengths of each party;
(b) whether a party was required to comply with conditions not reasonably necessary
for the protection of a company's legitimate interests;
79 Ibid, at 323.
80 Samton Holdings , note 78 at 322.
81 Ibid.
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(c) whether a party was able to understand any documents relating to the supply or
possible supply of the goods or services;
(d) whether a company exerted any undue influence or pressure on, or used any
unfair tactics against, a party;
(e) the amount for which, and the circumstances under which, identical or equivalent
goods or services could have been acquired from or supplied to another company;
(f) the extent to which a company discriminates between parties in similar
transactions;
(g) the requirements of any applicable industry code;
(h) the requirement of any other industry code, if a party acted on the reasonable
belief that the company would comply with that code;
(i) the extent to which a company unreasonably failed to disclose:
(j) intended conduct that may affect the interests of a party;
(k) risks arising from intended conduct;
(l) the extent to which a company was willing to negotiate with a party; and
(m) the extent to which all parties acted in good faith.
(b) THRESHOLD REQUIREMENT: SMALL BUSINESS TRANSACTIONS?
Section 51AC is different to s51AA in two key respects. First, section 51AC is directed to
protecting small businesses. The section applies to transactions involving the supply to or
acquisition of goods or services at a price not exceeding $3 million. Indeed, as part of its
election promise to the small business sector, the Federal Government provided the ACCC
with additional funding to enforce this provision.
However, there is authority to support the proposition that large corporations may avail
themselves of this provision.
Ø Reading Australia Leasing Pty Ltd v Roadshow Film Distributions Pty Ltd82
This case illustrates that the operation of section 51AC may not be limited to small
business transactions.
In early 2001, an independent cinema operator, Reading Entertainment (Aust) Pty Ltd (the
subsidiary of a significant US company) brought an action against film distributor
Roadshow (a subsidiary of Village Roadshow), alleging that Roadshow’s blanket refusal to
supply it with first release films was in breach of the Cinema Code of Conduct and
unconscionable within the meaning of section 51AC.
Reading argued that section 51AC applied as it was an unlisted company and the supply of
each first release film constituted a single transaction which fell within the then $1 million
threshold. Roadshow raised the point that:
82 Directions and Interlocutory Hearing before Justice Merkel in the Federal Court of Australia, Victorian District Registry, 28March 2001
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.. can it be said that this company which has shareholders’ funds of $US100 million,
is the sort of company that has been dealt with in an unconscionable fashion ...
Roadshow subsequently gave undertakings to the Court that it would comply with the
Cinema Code and assess the supply of first release films on a case by case basis, rather
than issuing a blanket refusal to supply.
Ø Ford Motor Company of Australia Ltd v Arrowcrest Group Pty Ltd83
Ford sought an injunction in response to a threat from ROH Automotive (a division of
Arrowcrest) to withhold supply unless Ford entered into a new long term supply contract.
Ford was successful in obtaining an interim mandatory injunction which required ROH
Automotive to resume and continue to supply products to Ford until 27 May 2002, thereby
avoiding an assembly line closure.
The injunction was awarded on the basis that there is a serious question to be tried thatROH Automotive’s conduct was unconscionable and in breach of section 51AC of the TPA.
Marshall J was satisfied that, given that Ford was not a listed company in Australia, and
that the remaining value of the contract was approximately $2 million, the arrangement
came within the ambit of section 51AC for the purposes of providing injunctive relief.
Interestingly, the $3 million threshold above which section 51AC does not apply was
interpreted by the Federal Court as relating to the remainder of the relevant contract rather
than the total value of the contract.
This decision has important ramifications for the application of section 51AC.
(c) CIRCUMSTANTIAL OR SITUATIONAL INEQUITY?
As discussed, the financial threshold is a significant difference between sections 51AA and
51AC of the TPA. The other significant difference is that section 51AC lists the relevant
factors a court may take into account when determining whether conduct is unconscionable
within section 51AC. This list broadly describes circumstances of commercial inequity or
disadvantage. Sections 51AC(3) and (4) require consideration of both the procedural andthe substantive fairness of a bargain, (see for example sections 51AC(3)(e) and (f)).
Ø ACCC v Simply No-Knead (Franchising) Pty Ltd84
This was a test case for section 51AC, where a franchisor was found to have acted
unconscionably when it:
• refused to deliver product to its franchisees;
• deleted franchisees telephone numbers from Telstra’s 013 Directory Assistance
service;
• refused to negotiate with franchisees with whom it was in dispute; and
• refused to provide disclosure documents as required under the Franchising Code.
83 Directions and Interlocutory Hearing before Justice Marshall in the Federal Court of Australia, Victorian District Registry,17 May 2002.
84 (2000) 104 FCR 253.
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Justice Sundberg described the conduct as “unfair, bullying and thuggish” and concluded
that it amounted to unconscionable conduct in contravention of section 51AC. 85. Much wasmade in the judgment about ‘unfair and unreasonable [behaviour] having regard to the
franchisor/franchisee relationship’.86
In so saying, Sundberg J appeared to be comparing Simply No-Knead's conduct with some
ideal or normative relationship between franchisor and franchisee. A difficulty with such an
approach is determining the outer parameters of the ideal or normative relationship in
cases to come.
In any event, the decision clarifies the interaction between section 51AA and section 51AC
and confirms that it is not necessary to show a judicially recognised form of ‘special
disadvantage’ to establish a contravention of section 51AC.
3. Dawson Inquiry issues
One of the key areas of debate before the Dawson Inquiry was the breadth and operation
of section 46 of the TPA. Not surprisingly the ACCC and representatives of small business
want to strengthen its scope, and believe that the unconscionability provisions of the TPA
have not served their purpose in protecting the commercial dealings of small businesses
with large companies.
In its submission to the Dawson Inquiry, the ACCC expressed its concerns with the
evidentiary difficulties of proving proscribed purpose under section 46 and advocated the
introduction of an "effects" test.
3.1 THE INTRODUCTION OF AN EFFECTS TEST
(a) ACCC SUBMISSION
An 'effects' test would allow a court to consider the effect of a corporation's conduct. The
ACCC submits that an effect test would:
• support the policy objectives of Part IV of the TPA to promote competition
(competition can be damaged irrespective of the purpose motivating that conduct);
• bring section 46 into line with the other provisions in Part IV of the TPA which also
consider the effect of the conduct on competition;
• overcome the forensic difficulties in proving purpose under section 46. (The ACCCclaimed to be unable to pursue many complaints because of an inability to obtain
sufficient evidence of proscribed purpose);
• be more effective than a purpose test in evaluating conduct in new technology
markets, where there are incentives for unilateral anticompetitive conduct such as
predatory pricing, exclusion or undesirable tying and bundling or when network
effects are present; and
85 Ibid, at 270.
86 Ibid, at 269.
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• bring section 46 into line with similar overseas provisions.87
(b) RESPONSE TO ACCC SUBMISSIONS
The submissions in response to the Dawson Inquiry suggested that an effects test could:
• encompass behaviour that has an adverse impact on a competitor rather than on
competition, regardless of the legitimate purpose behind the relevant behaviour.
Other provisions of the TPA which contain an “effects test” measure the effect on
competition, not just on an individual competitor;
• create judicial precedents which confuse the line drawn between anti-competitive
and strongly competitive conduct as it invites greater regulatory error than thecurrent purpose test given the necessity to examine complex market structures and
use forecasting; and
• have the following impact on competition:
(i) cause business activity to stagnate as companies prefer not to innovate or
move into new industries because of the uncertainty associated with
activities in new markets; and
(ii) force companies to predict the impact of and avoid vigorously competitive
conduct which has the effect of excluding or eliminating a competitor so as
not to risk breaching the law or being investigated by the ACCC. 88
3.2 DIVESTITURE ORDERS
The use of divestiture powers, in addition to the merger divestiture powers under section
50 of the TPA, was mooted before the Dawson Inquiry, with the ACCC arguing that such a
remedy warranted consideration.
This could be a powerful and fairly invasive remedy which would naturally require carefuland ongoing scrutiny. It may also prove impractical since it presumes that there is a willing
purchaser for the divested assets. The order may arguably have anti-competitive effects
as there is no guarantee that:
• the divested assets will be disposed for market value (note the possibility of a
constitutional challenge on these grounds); or
• the corporation will still be capable of efficient and competitive conduct (previously
enjoyed by economies of scale) once divested.
87 ACCC, Submission to the Review of the Trade Practices Act 1974 (Cth), 2002 at pages 63-105.
88 See, for instance, submissions from Business Council of Australia, the Law Council of Australia and Allens ArthurRobinson to the Review of the Trade Practices Act 1974 (Cth).