1

Credit and Unconscionability – The Rise and Fall of Statutes

W A Lee Equity Lecture 2020

The Hon Justice Peter Applegarth AM

Supreme Court of Queensland

19 November 2020

A reminiscence

In 1976, aged 17, I became a first year student at the only law school in Queensland. I fell

under the undue influence of older boys, like Glenn Martin and Peter Murphy, and their

undergraduate humour. I still am.

Back then Justice Martin might have been described as a songwriter, but a better description

would have been a lyricist, since he and others stole the melodies of other people’s songs

and added lyrics about lecturers.

The song about Tony Lee was based on the ABBA hit Rock Me. It was called Equity and

started:

“Equity

Couldn’t have passed

Without Tony Lee

You can do magic, baby

With your trusts and duties,

fiduciary relationships”

It may be the only popular song to have used the words “fiduciary relationships”. It was

sung around the cloisters of the Forgan Smith building.

Tony Lee’s appeal spread much further. In 1984 during a lecture in Oxford we were told by

an envious academic about a Mr Lee in Australia who managed to get his ideas enacted into

law. I was, and remain, very proud that I was taught by such an academic. I am privileged

to be invited to give this lecture.

Whatever happened to the Moneylenders Act?

When asked to select a topic, I thought I would continue a conversation started by Justice

Maxwell, President of the Victorian Court of Appeal, about the concept of

“unconscionability” titled “Equity and Good Conscience: the Judge as Moral Arbiter and the

Regulation of Modern Commerce”.1

1 See Justice Chris Maxwell, ‘Equity and Good Conscience: The Judge as Moral Arbiter and the

Regulation of Modern Commerce’ (Speech, Victoria Law Foundation Oration, 14 August 2019).

https://www.supremecourt.vic.gov.au/sites/default/files/2019-08/vlf_equity_and_good_conscience_-

_web_1.pdf

2

I decided to confine the topic to unconscionability and moneylending because credit has

featured, in one way or another, in my life as a lawyer. As an articled clerk I was a spear-

carrier in a glamorous takeover case, but the daily grind of work included an hour or two

each day of less glamorous debt recovery on behalf of licensed moneylenders. The first

paragraph of each statement of claim read “The plaintiff is a licensed moneylender pursuant

to the Moneylenders Act”.

This recollection may prompt you to wonder “Whatever happened to the Moneylenders

Act?” That is a fairly easy question to answer. It leads to the era in which unlicensed

moneylenders, including many solicitors’ private mortgage lending businesses, came to play

a large role in supplying credit for property development and other purposes. Those lenders

eventually came to be regulated in different ways. The rise and fall of Gold Coast

moneylenders has given many of us lots of work. The implosion of the multi-billion dollar

group MFS (aka Octaviar), which started life as the private mortgage lending business of a

Southport firm of solicitors, is an example.

If Equity was doing its job why did we ever need the Moneylenders Act?

A more interesting question than “Whatever happened to the Moneylenders Act?” is “Why

did we ever need the Moneylenders Act?” If Equity was effective to protect the public from

harsh or unconscionable transactions, why was there a need for legislation to regulate

moneylenders and give courts power to re-open harsh and unconscionable transactions.

To answer that question I took from my shelf a magnificent book by an academic of Tony

Lee’s generation: Patrick Atiyah’s The Rise and Fall of Freedom of Contract.2 Atiyah gave

the answer.

To put the answer in context I will spend a short time compressing 2000 years of law about

usury and moneylending, and then describe Atiyah’s big picture about the historical tension

between freedom of contract and the urge to protect, either in the form of equitable remedies

against unconscionable conduct or statutory protections.

Also I want to pay tribute to the recent work of a young academic, Dr Jodi Gardner, whose

doctoral thesis encourages us to think beyond freedom and protection to a third concept –

the provision of welfare and a social minimum.3

I will briefly survey the scope of statutory protections which draw on the concept of

unconscionability and the High Court’s decision in ASIC v Kobelt.4

Finally, inspired by admirable academics like Atiyah and Gardner, I want to focus on some

of the shortcomings of using legal remedies for unconscionable conduct to rectify what are,

in essence, social problems of poverty, which demand a whole of society solution.

To be clear: private law remedies based on notions of unconscionability should be available

to protect the poor and disadvantaged from exploitation. However, the limits and unintended

consequences of using private law remedies to solve the problem of poverty need to be

2 P S Atiyah, The Rise and Fall of Freedom of Contract (Oxford University Press, 1979) (“Atiyah”). 3 Jodi Gardner, ‘How to Approach High-cost Credit: Looking Beyond Freedom and Protection’ (PhD

Thesis, University of Oxford, Corpus Christi College, 2018) (“Gardner”). 4 (2019) 267 CLR 1; [2019] HCA 18 (“ASIC v Kobelt”).

3

considered. As essential as it may be to use equitable and statutory remedies to protect a

poor family which is forced into the grips of payday lenders to pay for food or an unexpected

expense, the over-use of those remedies may lead to sources of funds to individuals and

small businesses drying up. Even the appropriate use of those remedies is an ad hoc and

insufficient response to the problem of poverty.

Social policy should ensure that there are fewer poor people who fall into the grips of short-

term lenders in order to feed their children and pay for life’s necessities, and then look to

courts to rescue them from a debt spiral.

A very short history of the law of moneylending

The following sprint through the history of moneylending draws heavily on Atiyah’s The

Rise and Fall of Freedom of Contract and Dr Gardner’s thesis about how to approach high

cost credit. They, in turn, drew upon the works of legal historians like Professors Simpson

and Baker and historians like R W Tawney.

Aristotle argued that usury is unproductive and unnatural and therefore unjust. While the

creation and accumulation of wealth was to be encouraged, money was not to be loaned

merely for the purpose of making money.

Legal protection against usury has its origins in religious beliefs. Condemnation of usury

was not limited to Judeo-Christian beliefs. It can be found in all major religions.5

Usury and moneylending are condemned in the Old Testament, but the prohibitions are often

interpreted to only apply to lending to members of the same religion or social group.6 The

teachings in the New Testament are not as strong, but there are important passages in which

Jesus condemns usury and encourages his disciples to “lend, hoping for nothing again; and

your reward shall be great”.7 Jesus went into the Temple and cast out the money changers,

calling them thieves. As noted, prohibitions on charging interest applied only to loaning

money to a kinsman or fellow clansman. Therefore, Jews could not charge interest to Jews

but could loan to Gentiles. As a result, moneylending was practised by Jewish communities

with the charging of interest on loans as a standard practice from the fifth century BC.8

Early laws about moneylending reflected the religious prohibition on usury that applied to

Christians by virtue of canon law and which were enforced by the Ecclesiastical courts.

The moral condemnation of excessive interest was articulated by Martin Luther in 1524,

who spoke of some who “not only deal in little sums, but also take too much in return – 7,

8, 9, 10%”. Luther wrote that the “rules ought to look into this” because the poor common

people were secretly imposed upon and severely oppressed.9 In his 1519 “Sermon on Usury”

and his 1540 “Admonition to the Clergy that they Preach against Usury” Luther railed

5 Gardner, 135, citing Vincent D Rougeau, ‘Rediscovering Usury: An Argument for Legal Controls on

Credit Card Interest Rates’ (1996) 67 University of Colorado Law Review 1, 25. 6 Ibid 136-137. 7 King James Bible, Luke VI, 35. 8 Gardner, 137-138. 9 Gardner, 78 citing Martin Luther, Von Kauffshandlung vnd Wucher (On Trading and Usury) (Durch

Hans Lufft, 1524).

4

against the sin of usury.10 Still, Luther and others recognised the economic benefits obtained

from access to credit. While interest should not be charged on small sums or to the poor, the

charging of interest in commercial settings was accepted. This might be said to involve an

early acknowledgement that different borrowers should be treated differently.11

Until the end of the fifteenth century, all lending at interest was prohibited. However,

Professor Simpson says that common lawyers were willing to enforce penal bonds which

could, in practice, provide a method of charging interest.12

The term “usury” once meant the charging of any interest on money: it literally meant

payment for the use of money. The word developed, however, a different meaning

associated with an unconscionable, extortionate or excessive rate of interest.13

Legislation intervened. The rise of commerce and a philosophy favouring economic

freedom eclipsed religious arguments against charging interest. Legislation was passed in

1545, but repealed in 1551, allowing interest to be charged. An Act of the Elizabethan

Parliament in 1571, while declaring that “all usurie being forbydden by the lawe of God is

synne and detestable”, removed the prohibition on loans attracting interest provided it did

not exceed 10%. The Act did not permit the lender to sue for interest, but enabled recovery

of the loan. In practice, the effect of the 1571 Act was to permit interest at rates of 10% or

less. In 1623 the rate was reduced to 8% and the enforceability of such interest was

conceded.14

Francis Bacon’s 1601 text on usury had described it as a “lazy trade” that unfairly

disadvantaged the poor, centralised wealth and impeded industrial development. The

charging of interest was said to create “the canker and ruin of many men’s estate; which in

process of time, breeds a public poverty”.15 While arguing that society required protection

from usury, Bacon recognised that it had some benefits, including the encouragement of new

industry and trade, particularly for new merchants. It also enabled people with access to

funds to survive difficult periods without having to sell their possessions.

After considering the pros and cons of usury, Bacon suggested a two-tiered approach.

Anyone could lend money, but only at a maximum rate of 5% per annum. In addition, a

category of licensed moneylenders would be created who would be allowed to charge higher

rates of interest (up to 10% per annum), but would then be subject to regulation and

limitations.16 In response to the criticism that his proposal allowed or encouraged

10 Carter Linberg, ‘Luther on the Use of Money’ (Christian History Institute).

https://christianhistoryinstitute.org/magazine/article/luther-on-the-use-of-money;

John D Singleton, ‘‘Money is a Sterile Thing’: Martin Luther on the Immortality of Usury

Reconsidered’ (2011) 43(4) History of Political Economy 683. 11 Gardner, 79. 12 A.W. B. Simpson, A History of the Common Law of Contract (Oxford University Press, 1975) 113-

117, cited in Atiyah, 66. 13 R H Tawney, Religion and the Rise of Capitalism (1926) 109. 14 W S Holdsworth, A History of English Law (Methuen, 1937) Volume 8, 109-110. 15 Francis Bacon, The Essayes or Covnsels Civill and Morall of Francis Bacon: baron of Verulam,

viscount St. Alban, and lord higih chancellor of England (Judy Boss 1998 tr, Renascence Editions,

1625), cited in Gardner, 141. 16 Ibid. Gardner, 142.

5

unconscionable behaviour, Bacon stated that “it is better to vindicate usury, by declaration,

than to suffer it to rage”.17

Bacon recognised the social value of credit and the necessity to allow lenders to charge some

level of interest for the use of their money, but also saw a need for legislative protection,

including regulation of interest rates.

The passage of legislation allowing interest to be charged at up to a certain rate reflected a

new morality to suit the commercial conditions of seventeenth century England. As Atiyah

notes, in 1622 it was being said by the judges that “usury which is allowed by statute has

obtained such strength by usage, that it would be a great impediment to traffic and commerce

if it should be impeached”.18 He continued:

“But in another sense the ideas about usury lingered on, and indeed, have never

wholly disappeared from English moral or legal thought, though the flame flickered

very low in the middle of the nineteenth century. The idea that merely seeking a

return for a loan was itself something usurious and sinful had largely disappeared

by the seventeenth century; but the idea that an extortionate or unfair bargain was

morally unacceptable did not disappear. The forfeiture of a mortgage, or a penalty

on a bond, even ‘excessive’ interest, continued to be repugnant to good conscience,

and subject to the control of the Chancellors. Even in the eighteenth century,

interest rates remained under statutory control although it was becoming

increasingly clear that this control produced unsatisfactory distortions in the

economy.”19

Free-market economic theory

By the end of the eighteenth century the advent of free-market economic theory and the

widespread recognition of the benefits of the free flow of credit for the economy led to a

widespread acceptance of the legitimacy of interest-bearing loans. However, the

philosophical father of economic liberalism, Adam Smith, favoured an interest rate ceiling.20

Smith argued that the interest rate should be set slightly higher than the market rate. His

rationale was to allow low-risk borrowers to continue to invest in socially useful activities.

Dr Gardner observes that Smith wanted to protect low-risk borrowers as opposed to low

income borrowers. Again, there was a recognition that different types of borrowers should

be treated differently. Smith did not favour an unregulated market, writing in The Wealth of

Nations that an absence of regulation would mean “the greater part of the money [would] be

lent … to prodigals and projectors, who alone would be willing to give this high interest

rate”.21

Smith warned against interest rates being fixed lower than the market rate because people

would simply find ways to evade the law. He was concerned that the capping of interest had

the potential to increase the costs of credit generally because the borrower would be required

to pay not just an interest component but an additional amount for the risk that the creditor

17 Ibid. 18 Sanderson v Warner (1622) Palmer 291, 2 Rolle Rep 239, cited in Atiyah, 66. 19 Atiyah, 66-67. 20 Adam Smith, An inquiry into the nature and causes of the wealth of nations (Volume II, IV [15], 357

(Liberty Fund, 1981). 21 Ibid.

6

was engaged in an illegal transaction. Smith perceived the borrower as being obliged to pay

for the risk that the loan was unauthorised and to, in effect, “insure his creditor from the

penalties of usury”.22 Borrowers would pay for the cost of the cap, not lenders.

Smith’s concern to protect low-risk borrowers directs attention to the issue of risk and a

matter which is central to the determination of whether an interest rate is extortionate or

excessive. It is the risk that the money will not be repaid.

Smith’s view that there should be restrictions on the amount of interest that could be charged

was rejected by Bentham in his Defence of Usury, first published in 1787. Bentham argued

against regulation on usury, writing that government limits on interest would affect

economic growth. He favoured an open credit market. His philosophy was that individuals

were best placed to make their own decisions about borrowing. Provided the borrower had

consented to the transaction, the transaction should be enforced. If, however, the consent

had been obtained improperly or by exploitation then that was an issue of fraud or duress.

Credit was perceived by Bentham to be the same as any other good or service. Since there

were no similar restrictions in the market for those goods and services, it was not appropriate

to fix the cost of credit. His work was remarkably influential, although it may not have

completely swayed Smith.23

Bentham’s defence of usury may have been influential on most economists and lawyers, and

the question of repealing the usury laws was raised by Brougham in 1816. However, there

was no public appetite for that change.24 As a result, a Parliamentary Select Committee was

established in 1818 as a means of educating the public about its own interests. Economists

like Ricardo gave evidence before the Committee to the effect that the laws served no useful

purpose, but merely compelled borrowers to pay higher rates of interest than they otherwise

would have done. At the time the Committee’s report was written, the market rate was lower

than the legislated rate, allowing an opportunity to repeal the laws without the threat that

borrowers would be charged extortionate levels of interest.

A Bill in 1821 to repeal the usury laws met opposition and did not proceed. An important

change was made in 1837, when bills of exchange payable in under 12 months were not

subject to the usury laws, allowing short-term commercial lending to take place at

appropriate market rates.25

In 1845, Byles J in Observations on the Usury Laws argued against their repeal, observing

that a problem arose from the difficulty of calculating the risk of default where the borrower

could not provide good security.26 Whereas it might be said that there was a market price

for the cost of borrowing from someone who offered good security, the market price for

someone who could not offer security had to be guessed at. Byles’ argument is summarised

by Atiyah:

22 Ibid IV [13] 356. 23 Gardner, 81, citing J Crimmins, ‘Political Economy and Projectors: Bentham’s Defence of Usury’ in T

Artemieva and M Mikeshin (eds), The Philosophical Age, The Science of Morality: J Bentham and

Russia (St Petesburg Center for the History of Ideas, 1999) 61. 24 Atiyah, 550. 25 Ibid 551. 26 John Byles, Observations on the Usury Laws (London, 1845).

7

“Moreover, the small borrower, ‘the inferior tradesman’ for example, is not a free

agent when he needs to borrow. He is at the mercy of the moneylender, and has to

borrow under duress. While the borrower with good security borrows in a

competitive market, the borrower without security has no open market to deal in.

He dares not disclose his circumstances or want of money for fear his business may

be destroyed by the resulting loss of credit. The result is a gross inequality in the

position of the parties.”27

Eventually the economic theorists who opposed the usury laws succeeded and they were

completely repealed in 1854.

The need for judges in applying the general law to follow the statutory lead was recognised

by Pollock CB who said that the repeal of the usury laws showed a new policy which the

Court should faithfully follow.28 Six years earlier, when writing to Bramwell, Pollock had

said it was the duty of decent judges to denounce usury when they came across it.29

The abolition of the usury laws in 1854 might be said to be a great moment in the history of

deregulation and a triumph of free market economic theory which informed the principle of

freedom of contract. However, within 20 years of abolition of the usury laws, acute social

problems arose. Atiyah observes:

“Rapacious moneylenders, backed to the hilt by the law, began to appear up and

down the country, advertising freely in the journals and newspapers.”30

The usual practice was to lend an amount and take a rate of interest for the same amount.

The original sum together with the interest would be added together and a promissory note

for the total amount taken as security. The borrower would sign a standard printed contract

agreeing to pay the interest in equal instalments but also providing that on any default the

whole sum would become due and payable, and would carry further interest. As a result,

upon default the total interest would be due and there would be further default interest on

the whole amount. With the benefit of these high interest rates, the moneylender would not

necessarily be in a hurry to take proceedings, but might use the threat of doing so to persuade

the borrower to enter into a new transaction, with all the earlier interest capitalised. The new

post Judicature Act procedure for obtaining a quick judgment of promissory notes meant

that the moneylender could threaten judgment and execution.31

These practices applied where there was no security for the loan. However, the Bills of Sale

Acts, which were designed to protect third party purchasers, gave a value to registered bills

by granting the holder of a registered bill priority over the claims of the trustee in bankruptcy

of the grantor. A registered Bill of Sale became a powerful form of security and there was

a massive increase in their use. Atiyah writes:

“It was clear that there was a real problem in distinguishing between transactions

of a legitimate commercial character, such as loans made for business purposes to

27 Atiyah, 551. 28 Flight v Reed (1863) H & C 703, 715; 158 ER 1067, 1071. 29 Atiyah, 551, citing Charles Fairfield, Some Account of George William Wilshere, Baron Bramwell of

Hever and His Opinions (Macmillan, 1898) 33. 30 Atiyah, 551. 31 Ibid 708.

8

farmers, small factory owners, or businessmen, and secured over their stock in

trade, on the one hand, and the straightforward consumer credit transaction, on the

other. But after the evidence given before the 1881 Commons Committee it was

difficult for anyone to doubt the need for consumer protection legislation. Those

most emphatic in their demands for reform here were the County Court judges who

saw the law being practically applied in their Courts by unscrupulous moneylenders

who came to extract their pound of flesh. Indeed, the County Court judges wanted

to repeal section 20 of the 1878 Act which made a registered bill good against a

trustee in bankruptcy; they argued that most of the bills were granted after the

grantor was aware that he was about to become bankrupt, and that these bills were

thus in fraud of other creditors. But they were also convinced that it was this degree

of security which encouraged the moneylenders to make small loans on the very

harsh terms commonly used, and that the repeal of the section would stamp out

these loans altogether.”32

Amendments to the Bills of Sale Act of 1882 are said to be one of the clearest examples of

consumer protection legislation which interfered with freedom of contract.33 Among other

things, it totally prohibited the use of bills of under £30. This provision incurred the wrath

of Bramwell who saw it as a type of

“… paternalist legislation which deprived some members of the community of a

valuable freedom in order to protect others from their own folly. The prudent and

cautious man who might have formerly borrowed money on the security of a bill of

sale for under £30, was now prohibited from doing so in order that less prudent and

less cautious people should not make fools of themselves. Inevitably, those who

did require small loans now had to pay a higher rate of interest, as they were unable

to grant the only security that they had formerly been able to. This was a classic

example of paternalist legislation passed in the interests of the majority at the

expense of the minority. It was not the last.”34

Problems with moneylenders continued in respect of unsecured loans. The default judgment

was a weapon which enabled a moneylender to threaten the borrower with imprisonment for

up to six weeks under the Debtors Act 1869. County Court judges were concerned at the

unfettered freedom of contract conferred on moneylenders.

A House of Commons Select Committee was formed in 1897 to consider the unscrupulous

activities of moneylenders. Its full title was “the Select Committee appointed to inquire into

the alleged evils attending Money Lending Transactions at high rates of interest, or under

oppressive conditions as to Repayment, between the poorer classes and professional

Moneylenders”. You can tell from its title in which direction this Committee was heading.

One moneylender who became famous was Isaac Gordon who defended himself before the

Committee with arguments that might have been deployed by a classical economist:

“I risked money and have a perfect right to make any bargain I think fit”.35

32 Ibid 710. 33 Ibid. 34 Ibid 710-711, citing Fairfield, above n 29, 136-137. 35 Atiyah, 711; (1987) H.C. Parliamentary Papers, Minutes of Evidence, xl. 405, 553.

9

Gordon admitted to charging interest of up to 3,000 and 4,000 per cent per annum, but said

that this was his right to make a contract like “every other trader”.36 The Committee reported

that “the nature of the evils alleged to be attendant upon the system of moneylending are

well known”.37

Those evils included misleading advertisements. The Committee observed that many

borrowers obtained loans when “default is inevitable … such as to force [the borrower] to

obtain renewal after renewal at increasingly extortionate rates until he is utterly ruined”.38

Moneylenders were said to “frequently display great cruelty and harshness”.39

The result was the Moneylenders Act 1900 (UK) which introduced a variety of new duties

on lenders with significant penalties for breach, including up to two years’ imprisonment

with hard labour. It required the registration of moneylenders. It also gave the courts power

to re-open moneylending transactions if the transaction was “harsh and unconscionable” or

otherwise “such that a court of equity would give relief”. In 1927 the 1900 Act was replaced

by a new system for annual licensing of lenders and restrictions on the way they could seek

business. The Act concerned the status of the lender as someone who carried on the business

of moneylending. It did not provide general protection for borrowers. As a result,

moneylenders found ways to circumvent the legislation. Instalment selling, hire purchase

and the sale of goods on credit were forms of lending that avoided the Act. Eventually this

led to legislative interventions in the UK with the Hire Purchase Act 1938 and other reforms

which eventually led to the Consumer Credit Act 1974.

Again, this legislative intervention conferred a power to re-open harsh and unconscionable

contracts. It enabled the Court to re-open an “extortionate” credit bargain “so as to do justice

between the parties”. A credit bargain was extortionate if it required payments which were

grossly exorbitant or “otherwise grossly contravenes ordinary principles of fair dealing”.

One sees the embodiment in legislation of a principle of equity.

One of the triumphs of Atiyah’s work The Rise and Fall of Freedom of Contract is its

weaving together these kind of legal reforms with social, political and economic history,

including the rise of classical economic theory which led to the repeal of usury laws in 1854

and 50 years later the enactment of the Moneylenders Act as a form of statutory protection

against the worst excesses of freedom of contract.

By the nineteenth century the case for protection against high cost credit contracts had

extended beyond the religious objection to usury. New economic theories emerged to

challenge the dominant classical theory. Marx asserted that lenders obtained profits without

undertaking any productive work. He also deployed emotional arguments likening

moneylenders to parasites.

John Maynard Keynes, in a more moderate vein, critiqued the vices of the open credit

market. He stated that if it was allowed to run without restriction it would impede industrial

growth and those with money would focus on exploitative moneylending instead of useful

36 Ibid 564. 37 The Select Committee on Money Lending, 1897 Report from the Select Committee on money lending;

together with the proceedings of the committee, minutes of evidence, appendix, and index (19th Century

House of Commons Sessional Papers, No 364, 1897) iii. 38 Ibid iv. 39 Ibid.

10

investments.40 The Great Depression was seen by many to expose the moral bankruptcy of

laissez faire economic theory. It led to widespread public acceptance of government

intervention, including the regulation of interest rates. President Franklin D Roosevelt in his

first inaugural address stated:

“Practices of the unscrupulous money changers stand indicted in the court of public

opinion, rejected by the hearts and minds of men. True they have tried, but their

efforts have been cast in the pattern of an outworn tradition. … The money

changers have fled from their high seats in the temple of our civilisation. We may

now restore that temple to the ancient truths. The measure of the restoration lies in

the extent to which we apply social values more noble than mere monetary profit.”41

Moneylending legislation in Australia

Unsurprisingly, given our political and legal heritage, the regulation of moneylenders in

Australia followed in the footsteps of English legislation. Dr Pannam observed in The Law

of Moneylenders that the legislation in force in all of the Australian States, the ACT and New

Zealand had common roots in the English Moneylenders Act of 1900 and 1927. Each

different jurisdiction “had taken as much, or as little, as it wanted from the English models

and introduced various amendments as particular problems arose”.42 Pannam called into

question why those differences should exist and urged the implementation of uniform laws.

Reform of the law relating to moneylending was referred to the newly-established

Queensland Law Reform Commission chaired by Justice W B Campbell and whose

members included Dr Bruce McPherson. It produced a working paper in April 1971 and a

report in April 1972. It reported that with the passage of time and the evolution of business

methods “it has become increasingly apparent that the existing legislation is in urgent need

of extensive overhaul to enable it to cope adequately with the present day attitude towards

the lending of money and with business procedures generally”.43 It commented:

“Whether it be for the purchase of a matrimonial home, the family car, or consumer

credit for the purchase of goods, modern society regards the lending and borrowing

of money as part of the normal way of life. The outlook of the whole community

on the question of money lending and the borrowing of money has changed

completely even in our own lifetime. Our parents prided themselves on owning

their own home. Today in many parts of the western world a credit rating is one of

an individual’s most cherished assets.”44

The Commission went on to observe that the bodies involved in the business of lending

money had completely changed, with trading banks now controlling most of the finance

corporations, whilst in the field of consumer credit many of the large department stores

financed their instalment credit sales by way of a modified form of hire purchase.

40 John Maynard Keynes, The General Theory of Employment, Interest and Money (MacMillan Cambridge

University Press, 1936) Chapter 23: Notes on Mercantilism – The Usury Laws, Stamped Money and

Theories of Under-Consumption, Section V, cited in Gardner, 144. 41 Franklin D Roosevelt, ‘First Inaugural Address’ (History Tools, 4 March 1933)

http://www.historytools.org/sources/froosevelt1st.html. 42 Clifford L. Pannam, The Law of Money Lenders in Australia and New Zealand (Law Book Co, 1965), v. 43 Queensland Law Reform Commission, Report of the Law Reform Commission on a Bill to consolidate

and amend the law relating to Money Lending (Report No 13, 1972) 3. 44 Ibid.

11

While there was agreement that the existing legislation was out of step with modern

conditions, there was a lack of unanimity as to the nature and extent of the reforms required.

The entry of banking and financial institutions into the moneylending field had raised

questions of the extent to which those institutions were subject to existing legislation. The

Commission favoured the relaxation of certain restrictions but believed that some restraints

were still necessary, both to regulate the lending of money by defining the rights and

obligations of lender and borrower, and also to ensure that “the unwary or perhaps even

foolhardy borrower is safeguarded from the unscrupulous or rapacious moneylender.”45

The demise of the Moneylenders Acts began even before the Queensland Law Reform

Commission’s review, when the Law Council of Australia appointed a committee to consider,

among other issues, particular problems arising out of consumer credit transactions.46 After its

report, the Standing Committee of Attorneys-General appointed a credit laws committee to

design draft legislation which would give effect to that committee’s recommendations. Both

Victoria and New South Wales introduced draft legislation in 1981, but following a large

number of public submissions received, those Acts were repealed in favour of an attempt at

new legislation which would provide uniformity in substantive credit provisions whilst

allowing individual States to accommodate their local requirements, policies and structures.47

The first state to pass the new and improved “uniform” legislation was Victoria in May 1984.

New South Wales followed shortly after in June. By the time the Credit Bill was before the

Queensland parliament in 1987, there was legislation in place in Western Australia and the

ACT as well.48 Although “simple and uniform credit legislation” was described by Mr Goss,

the Opposition Leader, as an oxymoron,49 the Credit Act 1987 (Qld) with some Queensland-

specific provisions was passed. It repealed the Queensland iterations of the Moneylenders Acts.

The new Credit Act regime had a new emphasis on the disclosure of the actual cost of credit,

and to regulate each form of consumer credit in a consistent way.50

Patterns and pendulum swings

This account of the long history of moneylending and its regulation, drawn mostly from the

works of Atiyah and Gardner, discloses some patterns. One may say that “the poor are

always with us”. Borrowers and lenders always have been, but their names and financial

instruments change with time. It is unfashionable now to use the term moneylender instead

of credit provider. In the age of the Roman Empire and about the same time as Jesus was

casting the money changers out of the Temple,51 there must have been “sub-prime lenders”

although they would not have been called that. There were probably “payday lenders”

during Shakespearean times. There were both good and bad moneylenders in the nineteenth

century. A good one was the philanthropist and reformer Baron Goldsmid, who helped

establish University College and University College Hospital and who championed penal

reform. His capital raising helped fund the building of railways and the London docks.

45 Ibid 4. 46 Queensland, Parliamentary Debates, Legislative Assembly, 19 March 1987, 948. 47 Ibid 948-949. 48 Ibid 949. 49 Queensland, Parliamentary Debates, Legislative Assembly, 8 September 1987, 2189. 50 Queensland, Parliamentary Debates, Legislative Assembly, 19 March 1987, 949. 51 King James Bible, Matthew XXI 12-18.

12

The urge to protect the vulnerable from usury and rapacious moneylenders has been a

constant, informing canon law, the work of the courts and statutory regulation. The

regulation has not taken the form of some uniform prohibition. Religious leaders,

philosophers, economists and legislators have seen fit to distinguish between categories of

borrowers. Luther referred to the “poor common people”. At different times it has been

thought that at least the small or the poor should have the protection of laws controlling

interest rates and the other terms upon which money is borrowed. Down the centuries to our

modern, consumer credit laws, there is a recognition that different borrowers should be

treated differently. Some categories of borrowers are perceived to be vulnerable and in need

of protection. Other larger borrowers are seen to not require the same degree of protection

or any protection at all. Principles of personal autonomy or political and economic

philosophies dictate that they should be free to contract, and not bear the cost of regulation

which imposes costs on lenders which inevitably are passed on to borrowers.

The legal forms and the technology by which money is lent have changed over the centuries

as the modern global economy has developed. However, the issues confronting courts,

legislators and regulators are remarkably similar. As Dr Gardner says:

“There has been an ongoing pendulum approach to regulation, swinging between

the freedom and protective stances …”52

The story is not simply one of judge-made law. It is as much a story about statutes. They

may be statutes correcting perceived defects in the general law or preventing the pendulum

swinging so far in favour of protection that the flow of essential capital is inhibited.

The key events in this history such as the abolition of usury laws in 1854 and the enactment

of the Moneylenders Act in 1900, along with other forms of regulation, were heavily

influenced by political philosophy and economic theory. However, advocates for freedom

of contract as well as advocates for protection have not rested their arguments simply on

utility in terms of assessing the costs and benefits of too little or too much regulation, or no

regulation at all. Some of the arguments have a distinctly moral tone. Moneylenders are

vilified on occasions. So are some borrowers, who are characterised as the “undeserving

poor”.53 Individuals who are bad at managing money and who depend on payday lenders

are characterised as lazy, and as failing to take responsibility for their choices. Sometimes

their poverty is even seen as a kind of lifestyle choice. Historically, the same moral tone of

laziness has been directed at moneylenders, who are depicted as parasites who adopt a lazy

way of accumulating wealth rather than investing in production of goods and services.

Lawyers and courts

Atiyah analyses changes in the attitudes and values of the legal profession and judges that

were the result of the economic and social revolutions which occurred between 1770 and

1870, led by the political economists and philosophers like Adam Smith and Jeremy

Bentham. He accepts that judges are not monolithic in their opinions any more than any

other group, but observes that there may be somewhat more homogenous than other groups

52 Gardner, 146. 53 Charles Murray, ‘The Emerging British Underclass’ in Ruth Lister (ed), Charles Murray and the

Underclass: The Developing Debate (IEA Health and Welfare Unit in association with The Sunday

Times, 1996) 25, cited in Gardner, 56.

13

as a result of their early training and the pressures to conform in the English legal

profession.54 Also, as Dicey suggested, because judges tend to be appointed in middle age,

and as busy barristers get caught up in the hurly-burly of practice and have little time for

other activities, they tend to reflect opinions of an earlier time.55 In any case, the point is

made that most judges in the eighteenth and nineteenth century received a broad liberal

education before embarking on legal practice and many of them would have been familiar

with the works of Adam Smith.56

The earlier part of the century between 1770 and 1870 included the influence of Lord Eldon

as Lord Chancellor and involved “the old tradition of benevolent paternalism, particularly

evident in Equity but also known in the common law throughout the eighteenth century”.57

These views came to be eclipsed by a new generation of lawyers who grew up under the

influence of Adam Smith with notions of “self-reliance, freedom of contract and each man

for himself”.58 A new generation of lawyers became judges. One of them, Sir John Byles,

was interested in political economy and was influenced by Ricardo. However, later in life

he concluded that much political economy was fallacious. His 1845 work Observations on

the Usury Laws, warned of the dangers posed by demands for their repeal. He observed that

the political economists were far more disposed than their master, Adam Smith, “to indulge

in abstract reasoning, and to acquiesce in its conclusions as truths, which may be safely made

the basis of legislation”.59 Byles urged that these theories needed testing against experience.

Byles challenged the fundamental theory of the political economists which demanded

freedom of contract and the repeal of usury laws. This is the principle that individuals are

the best judges of their own interests. Byles wrote:

“The rule proposed, that is to say, perfect freedom in contracts and an uniform

application of the law to them all, is specious and seducing, from its simplicity. It

is easily understood and easily applied. Men congratulate themselves on their

superior wisdom, and look down with a smile of contempt on the antiquated and

barbarous rubbish of public regulations. The painful duty of investigating details,

and judging by experience of the applicability of the principle to particular classes

of case, is superseded.”60

Byles went on to observe that experience had shown that regulation of many contracts was

desirable. One good example is the Factories Acts. Byles observed that where contracting

parties are not bargaining as equals, but one of them has an extraordinary or unusual

advantage “the laws of all nations frequently recognise the claims of the weaker party to

extraordinary legislative protection”.61

A notable change in the nineteenth century, according to Atiyah, is that up until about 1830

courts were perceived to be more efficient as law-makers than Parliament in the field of

private law. Parliament recognised this by making only minor adjustments to the general

54 Atiyah, 360. 55 A. V. Dicey, Law and Public Opinion in the Nineteenth Century (2nd ed) 369, cited in Atiyah, 360. 56 Atiyah, 360. 57 Ibid 362. 58 Ibid. 59 Byles, above n 26, 1-3, cited in Aityah, 381. 60 Ibid 54. 61 Ibid 73, cited in Atiyah, 381-382.

14

rules of the common law. However, after 1830 things changed with improvements in the

law-making process, a growth in the bureaucracy and an increase in the amount of

information available to Parliament.62 With no comparable information flow to courts,

judges began to show greater deference to Parliament. One result was that “the judges were

encouraged in their tendency to withdraw into the realm of abstract general principle”.63

By 1870, the consensus was that public policy was a matter for statesmen, not lawyers. The

influence of political economy on the thinking of lawyers and judges reached its high point

by 1870. By this time new political and economic theories were emerging. Yet, classical

economic theory generally held sway in the courts. This is reflected in the remarks of Jessel

MR in 1875 about freedom of contract:

“If there is one thing which more than another public policy requires, it is that men

of full and competent understanding shall have the utmost liberty of contracting,

and that their contracts when entered into freely and voluntarily shall be held sacred

and shall be enforced by courts of justice. Therefore you have this paramount

public policy to consider in that you are not lightly to interfere with this freedom of

contract.”64

Jessel’s views came to the fore in a decision about moneylending. He upheld a

moneylending transaction entered into at rates of 60% by an alcoholic who had assets. Jessel

stated:

“I will assume him to have been a drunkard; a man who has had delirium tremens

may recover and take a very strong dose [i.e., an antidote] and be able to write very

firmly. A man may agree to pay 100 per cent if he chooses. There is no reason

why a man should not be a fool. A man is allowed by law to be a fool if he likes.

Suppose [the deceased] had gambled on the Stock Exchange, or at a gaming table,

or had spent his substance in debauchery. A man may be a foolish man to do that,

but still the law does not prevent him from being a fool.”65

The rise and decline of Equity

The domination of the principle of freedom of contract, championed by common law judges

in the second half of the nineteenth century, informed by principles of economic liberalism,

marked the triumph of one long-standing tradition over another. The common law had a

tradition of holding parties to their contracts unless the consent was vitiated by fraud, certain

kinds of mistake or duress. The tradition of the Court of Chancery was different. Atiyah

describes it as a tradition of “regulation, protection, paternalism” that probably was inherited

from the tradition of the Tudor Councils which in the reign of Elizabeth, exercised a

considerable degree of control and regulation of the economy.66 Atiyah quotes the seminal

work of R H Tawney, Religion and the Rise of Capitalism which described the moderating

influence of the Council in the Tudor period:

62 Atiyah, 384. 63 Ibid. 64 Printing and Numerical Co. v Sampson (1875) LR 19 Eq 465. 65 Bennet v Bennet (1876) 43 LT 246, 247. 66 Atiyah, 116.

15

“The Council, which keeps sufficiently in touch with business conditions to know

when the difficulties of borrowers threaten a crisis, endeavours to exercise a

moderating influence, by making an example of persons guilty of flagrant extortion,

or by inducing the parties to accept a compromise.”67

The Council was concerned with matters of State, but also intervened in individual cases.

While asserting that it did not intend to hinder an individual from asserting rights at common

law, it intervened to:

“stop cases of gross oppression, to prevent poor men from being made the victims

of legal chicanery and intimidation, to settle disputes by common sense and moral

pressure, to remind the aggressor that he is bound ‘rather to consider what is

agreeable … to the use of the State and for the good of the common wealthe, than

to seek the uttermost advantage that a landlord for his particular profit maie take

amonge his tenants’”.68

Tawney gives examples of the work of the Council, including a creditor who had been “hard

and unconscionable” being committed to the Fleet. The Council instructed the Justices of

Norfolk to put pressure on a moneylender who had taken “very unjust and immoderate

advantage by way of usury”.69

Atiyah’s work concentrates on contract law and charts the rise of formalism in the period

1770 to 1870 as the courts eschewed discussion of policy questions. The governing idea

was that it was for the parties to agree the terms of their contract and it was not the function

of the court to consider the fairness of the bargain. Its essential function was to determine

what the contract meant. If one party imprudently made a bad bargain and their foolishness

was exploited by a more powerful and smarter party, then it was for the court to enforce the

bargain. The growth of formalism gave the impression that “the laws of contract, like the

laws of political economy, were inexorable deductions drawn from neutral principles, while

in reality they were no doubt broadly in the interests of the new commercial and industrial

classes”.70

Atiyah charts other pressures on courts arising from the vast increase in population and

commercial activity. Until the creation of the County Courts in 1846 there were only 15

common law judges in the entire country. Even after the creation of the County Courts, the

superior courts had a huge workload. There was growing disquiet about the use of juries to

decide civil cases. They were slow and unpredictable and not suited to the commercial needs

of the new industrial class. As a result, courts framed what might have formally been seen

as questions of fact for the determination of a jury as questions of law.71 After 1830 civil

law was influenced by rule-utilitarianism. The courts tended “to search for fixed principles

which would govern a large number of cases without too close an inquiry into the facts, and

with the danger, therefore that the individual decision might be (or anyhow, might seem)

hard and perhaps even unjust”.72 In the middle of the nineteenth century courts also became

67 R. H. Tawney, above n 13, 171-173. 68 Ibid. 69 Ibid. 70 Atiyah, 390. 71 Ibid 391. 72 Ibid 392.

16

concerned with the long-term effects of decision: legal rulings were perceived to have the

benefit of influencing or educating the behaviour of others.

The growth of formalism is said to have coincided with the decline of Equity in an

institutional sense and also in the triumph of common law rules over discretion. The decline

in the influence of the Court of Chancery is associated with Lord Eldon’s 25 year tenure and

his capacity for procrastination. Bleak House is a work of fiction but in 1839 a practitioner

in the Court of Chancery declared that:

“No man, as things now stand can enter into a Chancery suit with any reasonable

hope of being alive at its termination if he has a determined adversary.”73

The declining influence of the Chancery Court is also said to have been affected by the

withdrawal of the Lord Chancellors from that court in the mid-nineteenth century.

A critical point made by Atiyah is that the decline of Equity by the mid-nineteenth century

was not simply a function of the number of judges in the Chancery Court or their capacity

for procrastination. It was the triumph of ideas, including the paramount principle of

freedom of contract, a preference for law to involve the application of firm principles over

the use of discretion to temper the strict application of those principles, and a consideration

for the strict application of those principles so as to avoid or make unnecessary a close

inquiry into the fact of the case at hand. The decline of the jury in common law actions also

withdrew a source of discretionary justice.

Most of us were taught that the Judicature Acts of 1873 – 1875 were concerned with a

rationalisation of civil procedure. Atiyah describes them as the culmination of a process in

which “English judges abandoned the short-term for the long-term considerations, the ideals

of mercy and equity in favour of the application of firm principles, the conflict-adjustment

function for the hortatory or deterrent functions of the law”.74 The merger of Law and Equity

resulted in four Equity judges being merged with 15 common law judges. A contemporary

observer noted that many of the common law judges had “an intellectual antipathy” to the

doctrines of Equity.75 For example, Lord Esher MR, was a common lawyer and “like most

of his colleagues, he was not above an occasional sneer at Equity”.76 Lord Chancellors

ceased to sit at first instance. Some Lord Chancellors had no experience of chancery

practice. Common lawyers with their belief in free markets, freedom of contract and self-

reliance dominated for a significant part of the nineteenth century. Things were to change

with “a succession of other judges, like Jessel, Cotton, Fry and Lindley” who “helped to

keep equitable principles alive in the Court of Appeal, and by the close of the century there

were some signs that the danger which the Judicature Acts had posed to Equity had been

averted”.77

Nevertheless, the common law tradition with a predisposition to uphold freedom of contract

triumphed. These principles served to limit the circumstances in which there might be relief

73 Atiyah, 393, citing Bowen, Progress in the Administration of Justice during the Victorian Period, 529. 74 Atiyah, 671. 75 Ibid 672, citing W.D.I. Foulkes, A Generation of Judges (London, 1886) 130. 76 Atiyah, 672, citing Veeder, ‘A Century of English Jurisprudence 1800-1900’ in Select Essays in Anglo-

American Legal History (Cambridge, 1907-9), i. 815. 77 Atiyah, 674.

17

against forfeiture or penalties. Parties were not to be easily relieved from the consequences

of their bargains.

The decline of Equity, and the triumph of freedom of contract, made it necessary for the

legislature to intervene in the form of the Moneylenders Act in 1900. It was the legislature

which conferred a discretion upon courts to reopen transactions which were harsh or

unconscionable: the very thing which had been the historic function of the Chancery Court.

In conferring such a discretion the legislature adopted the language of Equity.

This was not to be the last time the legislature enacted an equitable doctrine or adopted the

language of Equity. The Commonwealth Parliament has done so with statutory prohibitions

on unconscionable conduct. Before turning to them, I consider the general topic of statutes

and judge-made law.

Statutes and judge-made law

Prior to his appointment to the High Court, Justice Gageler wrote in 2011:

“Most cases in most courts in Australia are cases in which all or most of the

substantive and procedural law that is applied by the court to determine the rights

of the parties who are in dispute has its source in the text of a statute.”78

Most of what has been written about statutes and judge-made law concerns the complex

relationship between statutes and the common law. However, judges, lawyers and

academics often speak of two general sources of law: statute and judge-made law. The latter

relates to the exercise of both common law and equitable jurisdiction.

Australia’s leading Equity scholar and one of our most brilliant judges, Justice Leeming, has

observed that it is usual for common law and Equity to be assimilated in this context, and

says that it remains useful to consider Equity as a distinct body of law from the common

law. He argues that Equity’s response to statute is different from the response of common

law, for reasons that derive from its different conception of its role and different approach

to precedent. He argues that it is useful to consider the relationship in a more nuanced way

than commonly occurs.79 I agree and I will return to some of the points he has raised. For

the moment, and at the risk of not considering the relationship between statute and judge-

made law through a separate treatment of the relationship between statute and Equity, I will

initially refer to the dichotomy between statute law and judge-made law.

As noted, most of the discussion in this area concerns the relationship between the unenacted

law made up of common law and statute. Many treat the common law as a pristine,

unpolluted form of judge-made law, vastly superior to statute. The common law is

romanticised for its genius. The great treatise writers of the nineteenth century like Pollock

“saw the common law as a self-contained, scientific system, indeed, one of considerably

(sic) beauty and rationality”.80 A less romantic, and more realistic view of the common law

is that it is anything but systematic. As Professor Simpson states:

78 Stephen Gageler, ‘Common Law Statutes and Judicial Legislation: Statutory Interpretation as a Common

Law Process’ (2011) 37(2) Monash University Law Review 1, 1. 79 Justice Mark Leeming, ‘Equity: Ageless in the ‘Age of Statutes’’ (2015) 9 Journal of Equity 108. 80 Ibid 123.

18

“We must start by recognising what common sense suggests, which is that the

common law is more of a muddle than a system, and that it would be difficult to

conceive of a less systematic body of law.”81

Statute law has long been treated by judges and academics as an inferior product. In 1908

Roscoe Pound wrote in the Harvard Law Review that it was fashionable to deride legislation

and the capacities of those making it.82 Long after 1908 it remained “fashionable to preach

the superiority of judge-made law”.83

This long-standing tradition has coincided with what is described as the “Age of Statutes”.

The first chapter of Professor Guido Calabresi’s84 seminal 1982 work A Common Law for

the Age of Statutes is titled ‘Choking on Statutes’. Any modern lawyer knows the feeling.

One of the leaders of our Bar, Mr Pomerenke QC, reminded us in his 2017 lecture ‘Statute

and Common Law’ that upon his retirement in 2006, the Honourable Justice Bruce

McPherson, observed that the most remarkable change in legal practice over the preceding

40 years was the extent to which the common law had been steadily displaced by statute law.

According to Justice McPherson’s calculations, in the period between 1988 and 2006 (a

period of less than 20 years), the Queensland Parliament had enacted five times more

legislation than was enacted in the 135 years from 1828 to 1962.

My present concern is not with the proliferation of statutes. It is with rival conceptions about

the relationship between statute and judge-made law. Sir Jack Beatson wrote that the

dominant view in common law systems is that common law and legislation are like “oil and

water”, and “a form of legal apartheid”.85 Others see the relationship quite differently.

Atiyah described statute law and the common law as a “kind of legal partnership”.86 Chief

Justice Gleeson stated:

“Legislation and the common law are not separate and independent sources of law;

the one the concern of Parliaments, and the other the concern of courts. They exist

in a symbiotic relationship”.87

Justice Leeming, in an article about theories and principles underlying the development of

the common law, argued “the sooner critical attention is paid to the statutory elephant in the

room, the better”.88 He wrote:

“‘Common law’ is a deeply attractive, but also a deeply misleading concept. What

is commonly thought of as ‘common law’, namely, the various bodies of judge-

made law, including equity and admiralty, taught in law schools and written about

81 A.W.B. Simpson, ‘Common Law and Legal Theory’ in W Twining (ed), Common Law and Legal Theory

(1986) 15. 82 Roscoe Pound, ‘Common Law and Legislation’ (1908) 21(6) Harvard Law Review 383, 383-4. 83 Ibid. 84 Atiyah and Calabresie were long-standing friends from student days. 85 Jack Beatson, ‘Has the Common Law a Future?’ (1997) 56(2) Cambridge Law Journal 291, 308. 86 P.S. Atiyah, ‘Common Law and Statute Law’ (1985) 48(1) Modern Law Review 1, 6. 87 Brodie v Singleton Shire Council (2001) 206 CLR 512, 532 [31]. 88 Justice Mark Leeming, ‘Theories and Principles Underlying the Development of the Common Law –The

Statutory Elephant in the Room’ (2013) 36(3) UNSW Law Journal 1002, 1003.

19

in law books is and always has for the most part been sourced in statute and is

unintelligible without reference to statute.”89

It is also appropriate to not speak in undifferentiated terms about statutes. Leeming describes

two broad classes of statute (while noting that the distinction is not clear-cut). The first are

statutes which modify or qualify already existing rules and principles of judge-made law.

An important example, and one close to Tony Lee’s heart, are the provisions of the Trustee

Acts dealing with the powers and duties of trustees. For common lawyers, the Civil Liability

Acts springs immediately to mind. The second, broad category of statutes are those that

create new rights and obligations in a whole range of areas governing welfare, taxation,

employment law and discrimination. Justice Finn (who was an academic in Queensland in

the late 1970s and also the subject of a song by admiring students) wrote as a judge in 1996

that:

“… we live in an age of statutes and … it is statute which, more often than not,

provides the rights necessary to secure the basic amenities of life in modern

society”.90

As noted, the interaction between statute law and the common law is a huge issue. It has

been the subject of significant contributions by judges, scholars and lawyers. A significant

contribution was by Sir Anthony Mason in his 2016 article “The Interaction of Statute Law

and Common Law”.91 Mr Pomerenke QC explored similar themes. The issues include

statute acting as a catalyst for judge-made law and statute picking up the common law. On

occasions the common law is developed by analogy to statute and common law may develop

by reference to policies which are evident in statutes. A major issue is the coherence of the

law. Inadequacies or inactivity in the development of judge-made law may be a spur to

legislation.

Justice Leeming counsels against the idea that the interaction between judge-made law and

legislation consists of a monolithic body of statute law when in fact statutes are of different

kinds. He also thinks it is sensible to consider how different bodies of judge-made law

interact with legislation and that Equity is different in material respects in its relationship

with legislation. By Equity he adopts the definition of Sir Anthony Mason as “distinctive

concepts, doctrines, principles and remedies which were developed and applied by the old

Court of Chancery, as they have been refined and elaborated since”.92 Despite the effect of

the Judicature Act there remain differences in technique. The technique of Equity of a judge

“evaluating the whole of the facts of the case, so as to craft a nuanced order for relief is quite

foreign to an approach of isolating issues for determination (by a jury) so as to determine the

availability as of right of orders”.93 This fundamental difference is said to still inform the

different approaches in Equity as opposed to common law. Justice Leeming also points to

different conceptions of common law and Equity. Whereas the common law saw itself as

self-contained, Equity never regarded itself as a self-sufficient system of principle. This

raises questions as to whether statute has influenced equitable doctrine differently from its

89 Ibid 1004. 90 Buck v Comcare (1996) 66 FCR 359, 364-5. 91 Sir Anthony Mason, ‘The Interaction of Statute Law and Common Law’ (2016) 90 Australian Law

Journal 324. 92 Leeming, above n 79, 118; citing Sir Anthony Mason, ‘The place of equity and equitable remedies in the

contemporary common law world’ (1994) 110 Law Quarterly Review 238, 238. 93 Leeming, above n 79, 119.

20

influence upon the common law and, conversely whether Equity has influenced statute

differently from the influence of the common law. However, in both fields it is apparent that

a consistent pattern of legislative policy may inform a change to judge-made law.94

Leaving aside Justice Leeming’s argument that Equity’s response to statute may be different

from the response of common law, due to each body of law’s conception of its role, the point

remains that there is a complex interrelationship between statute law and judge-made law.

Statute law responds to perceived inadequacies in judge-made law. One example is the

enactment of the Moneylenders Act, seemingly because of the inadequacy of judge-made

law to protect the vulnerable from rapacious moneylenders in the second half of the

nineteenth century. This arose because judges, in general, fell under the influence of free

market economic theories. Ideas of freedom of contract triumphed over notions that the law

exists to protect the vulnerable from exploitation from unfair bargains voluntarily entered

into. The Court of Chancery seemed not up to the task and so the legislature intervened.

However, when it did so it incorporated concepts drawn from the general law and, in

particular, equitable concepts.

A more modern example is the enactment in Australia, commencing in 1986, of a prohibition

on corporations engaging in conduct that is “unconscionable within the meaning of the

unwritten law”. Before turning to the history of those provisions and their consideration by

the High Court in ASIC v Kobelt, I should make what seems to me to be an important

distinction between the doctrine of unconscionability in private law and a statutory

prohibition on unconscionable conduct either in the form of unconscionable conduct within

the meaning of “the unwritten law” or a broader statutory definition of “unconscionable

conduct”. It concerns the purpose of the law.

The different purposes of unwritten law and statute law

Referring to what was then section 51AA of the Trade Practices Act 1974, which initially

prohibited unconscionable conduct in consumer transactions but which was extended in

1993 to business transactions, French J made an important observation in Australian

Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd:95

“It is to be observed that s 51AA does not purport to adopt the unwritten law relating

to unconscionable conduct and give to it the force of statute. In form it uses the

unwritten law to the extent that it provides for the characterisation of conduct as

unconscionable and then prohibits such conduct.”

This distinction is significant. A body of private law may have a different purpose to a

practically identical body of statute law. Legislators and members of the general public tend

to see the law as having an instrumental purpose. Most members of the general public tend

to think of criminal laws and a raft of other statutes, such as legislation governing

occupational health and safety, as being enacted to influence behaviour in the future by way

of deterrence and education. Statutory prohibitions form part of a system of regulation.

They operate to punish past behaviour and, in that sense, correct a past injustice. But their

prime purpose is to influence future behaviour.

94 Ibid 127. 95 (2000) 96 FCR 491, 504.

21

When one turns to private law, such as the common law of negligence or equitable doctrines

about unconscionability, it is not evident (at least to some) that the purpose of the law is to

influence future behaviour as part of a broader system of regulation. Some would say that

the essential purpose of such a judge-made law is to achieve justice in a particular case.

Some would say that this is its only purpose. In tort law pitched battles are waged between

adherents of the corrective justice school and instrumentalists. Others think that it is wrong

to regard a body of private law, whether it be Torts or Equity, as being about one big thing.

A law may achieve justice in the case at hand and have the beneficial policy function of

influencing behaviour for the greater good.

A statutory prohibition on unconscionable conduct (as defined by the unwritten law which

is Equity) has an instrumentalist function. The law exists to influence future behaviour and

not simply to achieve justice between parties in a particular case in which the prohibition

has been contravened. As a result, significant issues arise about how courts might assess the

consequences of their determinations about unconscionable conduct on parties in the future

who are not parties to the dispute in the case at hand.

Modern statutory proscriptions against unconscionable conduct

A tort statute like the Civil Liability Act which builds upon judge-made law in the field of

negligence, cannot be understood without an understanding of that judge-made law.

Likewise, one cannot understand a statute which proscribes unconscionable conduct without

an understanding of the judge-made law which it purports to adopt or modify.

The various proscriptions against unconscionable conduct which have been enacted in

federal statutes since 1986 cannot be understood other than against the background of

Equity’s proscription against unconscionable conduct.96

The history of this legislation is conveniently summarised by Edelman J in ASIC v Kobelt.97

To summarise that summary, initial legislation in Australia prohibited unconscionable

conduct in consumer transactions. It was enacted in 1986 as a result of a recommendation

that there should be a statutory proscription based upon the equitable doctrine of

unconscionable conduct which was said to be a “familiar concept to Australian law”. It

included within its scope the equitable doctrine of undue influence. The new provision was

said to “at least” include conduct that would fall within Equity’s proscription against

unconscionable conduct.

In 1993 the provision was extended to business transactions with the result that section 51AA

of the Trade Practices Act 1974 prohibited corporations from engaging in conduct that was

“unconscionable within the meaning of the unwritten law”.

Further consideration by a Parliamentary Standing Committee in 1997 recommended “a

significantly strengthened provision to deal with the general problem of unfair conduct”. It

recommended a new provision for “small business consumers” that incorporated a range of

additional matters to which the Court could have regard in deciding whether conduct was

“unconscionable”. This became section 51AC. It was intended to “extend the common law

doctrine of unconscionability expressed in the existing s 51AA”. The Parliament preferred

96 ASIC v Kobelt (2019) 267 CLR 1, 94 [279]. 97 Ibid [283]-[291].

22

to use the language “unconscionable” rather than “unfair”. The idea that the new

section 51AC would be a significant addition to the armoury available to small businesses

proved misplaced. By 2008 a Senate Standing Committee reported that the section had fallen

short of its legislative intent. Courts were said to have not interpreted the section as broadly

as was intended.

Changes were implemented in 2010 to the Trade Practices Act by the introduction of the

Australian Consumer Law, and there were equivalent changes to the ASIC Act. Further

amendments were made in 2012 to confirm that the statutory proscriptions against

unconscionable conduct went beyond the scope of judge-made doctrines on

unconscionability. Interpretive principles were adopted to make clear that common law

requirements such as “special disadvantage” were not required and to confirm that

unconscionable conduct could extend beyond the formation of a contract to the way in which

it was carried out. These changes to the ASIC Act applied in connection with the supply of

financial services in trade or commerce.

Justice Edelman summarised the position as follows:98

“[295] This legislative history clearly demonstrates that although Parliament’s

proscriptions against unconscionable conduct initially built upon the

equitable foundations of that concept, over the last two decades Parliament

has repeatedly amended the statutory proscription against unconscionable

conduct in continued efforts to require courts to take a less restrictive

approach shorn from either of the equitable preconditions imposed in the

20th century, by which equity had raised the required bar of moral

disapprobation. In particular, statutory unconscionability permits

consideration of, but no longer requires, (i) special disadvantage, or

(ii) any taking advantage of that special disadvantage. Like other open-

textured criteria, such as ‘unfair’ or ‘unjust’, there is no clear baseline

moral standard for what constitutes ‘unconscionable’ conduct within s

12CB of the ASIC Act. Nevertheless, the history of development of that

statutory proscription demonstrates a clear legislative intention that the bar

over which conduct will be unconscionable must be lower than that

developed in equity even if the bar might not have been lowered to the

‘unreasonableness’ and ‘unfairness’ assessments in the various categories

in 19th century equity.”

Courts and unconscionability

In the 2019 Victoria Law Foundation Oration, Justice Chris Maxwell, the President of the

Victorian Court of Appeal, addressed how the concept of unconscionable conduct is

understood in law and its implications for judges.99 His Honour noted that the word

“unconscionable” is a word that is hardly ever encountered in ordinary usage and that

embedding such a moral concept at the centre of the substantive law governing business

regulation and consumer protection raises a number of questions. One is whether it is

appropriate for a judge to be a moral arbiter of business dealings: this is an issue of

legitimacy. Another question is whether judges have the requisite skill to be a moral

reasoner. Justice Maxwell observed on the legitimacy question that judges are constantly

98 Ibid 102. 99 Maxwell, above n 1.

23

called on to perform the role of moral arbiter in many contexts. On the question of capability

he cited jurists and philosophers, including Lord Goff who in 1989 referred to a judge’s

function as reasoning up from the facts of the case and searching for principles “which

accord with a professionally developed sense of justice and an intuitive sense of a just result

in the case before the court”.100

The third question which Justice Maxwell posed was whether such an imprecise standard as

being “against good conscience” is reconcilable with values of certainty and predictability

in the law so as to enable citizens to be able to arrange their affairs, knowing in advance

what is and what is not prohibited. Justice Maxwell noted that in the leading case of

Amadio,101 the High Court split 3:2. It also divided on unconscionability in the subsequent

case of Bridgewater102 and in the 2019 decision in ASIC v Kobelt,103 the Court divided 4:3 as

to whether the relevant conduct was in all the circumstances unconscionable. He referred to

Professor Birks’ observation that the word “unconscionable” is so unspecific that it simply

conceals a private and intuitive evaluation.104 However, President Maxwell argued that in

some cases other values must prevail over the demand for certainty. He was persuaded by

Equity scholars that a virtue of the concept is that it is not rule-like and that such an

unspecific concept may demand of citizens that they work out for themselves what

conscience demands as they act and plan. The aspirations of Equity were said to “promote

and encourage moral awareness and moral agency in the marketplace” and the risk of

conduct being found to be unconscionable and the uncertainty about where limits might be

drawn if a matter went to court might encourage a “precautionary approach”.105

That said, the nobler and subtler qualities of Equity in demanding certain standards in the

marketplace created an obvious tension between ethical, self-aware restraint and the drive

for profit and competitive advantage. Justice Maxwell drew on what Justice Keane had said

in his 2009 WA Lee Equity lecture “The Conscience of Equity” about self-interested action

being embodied in the law of contract and that the market economy involves rivalry and

participants seeking to maximise profit. In that speech Justice Keane had said:

“Equity never set out to bring to heel what John Maynard Keynes described as ‘the

uncontrollable and disobedient psychology of the business world”.106

Justice Keane built upon those observations in Kobelt, observing that the purpose of s 12CB

of the ASIC Act was to regulate commerce and that the pursuit of one’s own advantage is an

omnipresent feature of legitimate commerce.107

Justice Maxwell went on to observe that in making decisions whether to acquire financial

products or services most consumers are inescapably at a disadvantage because they engage

in those transactions relatively infrequently and lack the familiarity of traders who are in the

business of lending.

100 Ibid 8, citing Lord Goff, ‘The Future of the Law of Restitution’ (1989) 12 Sydney Law Review 1, 3. 101 Commercial Bank of Australia v Amadio (1983) 151 CLR 447. 102 Bridgewater v Leahy (1998) 194 CLR 457. 103 (2019) 267 CLR 1. 104 Maxwell, above n 1, 10, citing Peter Birks, ‘Equity and the Value of Certainty in Commercial Life’ in P

Devonshire and R Havelocks (eds) The Impact of Equity and Restitution in Commerce (Hart, 2019). 105 Maxwell, above n 1, 10. 106 Justice Patrick Keane, ‘The Conscience of Equity’ (2010) 84 Australian Law Journal 92, 111. 107 (2019) 267 CLR 1, 47.

24

With insights from what Commissioner Hayne had said in the Banking Royal Commission

and the observations of Edelman J in Kobelt which I have quoted, Justice Maxwell posed

the question of why courts were taking a restrictive approach, necessitating repeated

amendments of unconscionability provisions which sought to encourage courts to take a less

restrictive approach, shorn from the preconditions imposed in the twentieth century.

Justice Maxwell posed the question of whether the problem with courts being too restrictive

arose from the centrality of the moral concept of unconscionability in the statutory regulation

of business and whether adoption of a test of fairness might be conducive to greater certainty.

According to Justice Maxwell, a prohibition on conduct that was “in all the circumstances,

unfair” might be hoped to be better understood by all concerned and impose higher standards

of conduct.

ASIC v Kobelt

ASIC v Kobelt concerned a claim by ASIC that a “book-up” credit system, offered by Mr Kobelt

to residents of remote Aboriginal communities, was unconscionable conduct as proscribed by

the ASIC Act.

Mr Kobelt operated a general store on the Anangu Pitjantjatjara Yankunytjatjara lands in South

Australia selling groceries, fuel and second-hand cars. Customers of the “book-up” system

would give Mr Kobelt access to their bank account into which wages or government benefits

were paid, authorising him to withdraw funds as they were paid. Mr Kobelt would generally

apply half of the funds from each withdrawal to reduce the customer’s debt owing for goods

supplied by him, and make the other half available for the customers to spend at his store.

There was some provision for customers to spend their “share” at other stores or to obtain a

cash advance, but doing so incurred fees from Mr Kobelt.

ASIC had successfully argued in the Federal Court that Mr Kobelt’s conduct was

unconscionable.108 The Full Federal court disagreed,109 and special leave to appeal to the High

Court was granted. In the High Court, ASIC argued that:

• The Full Court did not give enough weight to the special disadvantage or vulnerability of

the customers, as against their basic understanding of the book-up system and willingness

to enter into them;

• The Full Court erred in overturning a finding that Mr Kobelt was engaged in predatory or

exploitative behaviour; and

• The Full Court gave too much weight to the incidental benefits or advantages of the book-

up system arising from cultural norms of the relevant Indigenous community.110

By a 4:3 majority, the appeal was dismissed and the Court declined to find that Mr Kobelt was

engaging in unconscionable conduct.

Kiefel CJ and Bell J considered that there must be a level of exploitation or unconscientious

advantage being taken of a special disability to found unconscionable conduct.111 They

108 Australian Securities and Investments Commission v Kobelt [2016] FCA 1327; [2016] FCA 1561. 109 Kobelt v Australian Securities and Investments Commission (2018) 352 ALR 698; [2018] FCAFC 18. 110 Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1, 29 [55] (per Kiefel CJ

and Bell J). 111 Ibid 48 [118].

25

explained that the absence of any undue influence, pressure or dishonesty were relevant

considerations which the ASIC Act required the Court to assess, even if the customers entered

into Mr Kobelt’s arrangement voluntarily.112 As there was basic understanding of the system

on the part of the customers and the customers had freely entered into the arrangement for

reasons beneficial to them, their Honours found there was no unconscionable conduct.

Keane J, in a similar vein, found there was no unconscionable conduct because there was no

exploitation or predatory conduct. His Honour considered that the mere vulnerability of the

customers was not sufficient.113 There was no evidence of any financial advantage obtained

by, or intended to be gained by, Mr Kobelt.114 Rather, Mr Kobelt’s system merely met the

peculiar needs of a highly unusual market.115

Gageler J reasoned differently, considering whether the customers “exercised freedom of

choice” in continuing to deal with Mr Kobelt.116 His Honour found that a significant

component of the unconscionability case fell away when it was accepted that the relationship

between Mr Kobelt and his customers was not an “involuntary consequence” of the system,

but rather a “matter of choice” of the customers.117 To use the particular cultural considerations

which influenced the customers’ choice to engage with Mr Kobelt’s system in support of a

vulnerability argument would, in his Honour’s view, be failing to afford the customers the

respect they are due in contemporary Australian society.118

Justices Nettle, Gordon and Edelman delivered strong dissents.

Nettle and Gordon JJ explained that it was not paternalistic to assess the vulnerability of Mr

Kobelt’s customers. Rather, the statutory standard of unconscionability required that their

vulnerability was assessed.119 Their Honours emphasised the power imbalance between Mr

Kobelt and his customers, the customers’ relative lack of choice and limited understanding of

the system, along with the lack of transparency as relevant to whether the customers entered

into the system voluntarily.120 Because Mr Kobelt’s system tied customers to his store and

made them dependent on his discretion, their Honours characterised the arrangement as

exploitative and predatory.121 Combined with the customers’ special disadvantage, this was

enough for their Honours to find that Mr Kobelt’s conduct was unconscionable.

Justice Edelman found that the book-up system was unconscionable, not because it was offered

and voluntarily accepted, but because of the manner in which it was offered and

administered.122 His Honour emphasised several factors as pointing “overwhelmingly” to a

conclusion of unconscionability, including the extreme difference in bargaining position

between Mr Kobelt and his customers, the discrimination by Mr Kobelt between Indigenous

customers who were offered the book-up system and non-Indigenous customers who were not,

and the level of control exercised by Mr Kobelt in deciding how his customers’ money could

112 Ibid 30 [58]. 113 Ibid 51 [125]. 114 Ibid 51 [125]. 115 Ibid 51-52 [127]. 116 Ibid 43 [102]. 117 Ibid 44 [107]. 118 Ibid 46 [110]. 119 Ibid 62 [159]-[160]. 120 Ibid 62 [159]-[160]. 121 Ibid 71-72 [205]. 122 Ibid 104-105 [302].

26

be used.123 For Edelman J, the customers made “no real choice at all” in choosing Mr Kobelt’s

system of credit, because he did not offer any alternative.124

A house divided?

The 4:3 division in the High Court in ASIC v Kobelt may suggest different things to different

people. To some it may be the sign of an imprecise standard of conduct which, despite

legislative amendments, remains anchored to a moral concept of “conduct that is so far

outside societal norms of acceptable commercial behaviour as to warrant condemnation as

conduct that is offensive to conscience”.125 A different view is that the statutory prohibition

on unconscionable conduct provides a sufficiently defined proscription which can be easily

applied in many clear-cut cases but which, by its nature, yields different conclusions in other

cases in which individual judges are called upon to make evaluative judgments about which

reasonable minds will differ.

In Kobelt, the Court was concerned with whether a system of book-up credit used to fund

the provision of second-hand motor vehicles, along with groceries and fuel, was

unconscionable. It arose in the context of commercial dealing with people who were socially

and economically vulnerable. In that factual context it is unsurprising that at least some

members of the High Court focused upon the issue of whether advantage was taken of that

vulnerability in a manner that might be characterised as exploitative. This is the way in

which the majority view has been interpreted, namely that the section adopts a standard that

requires exploitation of disadvantage by a party in a stronger position by conduct that is

“well outside the bounds of what is generally seen to be moral, right or acceptable

commercial behaviour”.126 However, as Allsop CJ observed in ASIC v Australia New

Zealand Banking Group Ltd (No 3),127 it should not be assumed that statutory

unconscionability requires the same kind of special disadvantage referred to in cases such as

Commercial Bank of Australia Ltd v Amadio.128

There is a substantial body of case law about the standard of conscience demanded by the

statute.129 The notion of conscience embedded in the statutory prohibitions does not involve

an “idiosyncratic personal view”, but is said to draw “from the deep and rich well of the

general law, common law and Equity, good faith and conscientious behaviour”.130 In

Paciocco, Allsop CJ had included in the values that informed the standard of conscience,

certainty in commercial transactions, honesty, the absence of trickery or sharp practice,

fairness when dealing with customers, the faithful performance of bargains and promises

freely made and:

“The protection of those whose vulnerability as to the protection of their own

interests places them in a position that calls for a just legal system to respond for

123 Ibid 105-106 [303]-[310]. 124 Ibid 104 [302]. 125 Ibid 40 [92] (per Gageler J). 126 Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd (No 2) [2020]

FCA 802, [29]. 127 (2020) FCA 1421, [42]-[44]. 128 (1983) 151 CLR 447. 129 See, for example, Paciocco v Australia New Zealand Banking Group Ltd (2015) 236 FCR 199 at 274

[296] cited in ASIC v Kobelt (2019) 267 CLR 1, [14]. 130 Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited

(No 3) [2020] FCA 1421, [63].

27

their protection, especially from those who would victimise, predate or take

advantage”.131

As will be apparent, the statutory prohibitions on unconscionable conduct are not limited to

categories of individuals who the law of Equity treated as being in a position of “special

disadvantage”.

Short-term lenders and borrowers

What should the position be where a party has to seek a short-term loan at a high interest

rate?

A raft of legislation governs the supply of consumer credit and powers are given to ASIC to

make product intervention orders under s 1023D(3) of the Corporations Act 2001.132

Legislatures have intervened to provide a variety of statutory protections, sometimes limited

to consumer credit, but sometimes of a more general kind. The protections include statutes

which permit the amendment of contractual terms, caps on interest rates, responsible lending

requirements, unfair contracts legislation and product intervention orders. These supplement

protections provided by the general law.

Legislatures are far better equipped than courts to regulate short-term lending. They can

regulate in ways which courts cannot by requirements for disclosure, cooling off periods,

licensing and administrative action by regulators. However, there will be cases in which

borrowers invoke statutory provisions which proscribe unconscionable conduct. The

existence of detailed statutory provisions which assume that certain categories of borrowers

need protection does not mean that other kinds of borrowers are not deserving of protection

under the general law or under provisions which prohibit unconscionable conduct.

My present concern is with the application of the statutory prohibitions on unconscionable

conduct to short-term lenders. Many of their borrowers will not be individuals or

“consumers”. A familiar example is where a trading business or a property developer

requires short-term credit to cover a temporary loss of liquidity or to provide sufficient time

for a development approval or a delay in the sale of a property. Another familiar example is

an unexpected delay in payment to a building contractor who is involved in a dispute. In

many such cases the borrower cannot offer security or the security which is on offer is of

uncertain value. A high interest rate is provided for by the lender on the basis that this reward

is necessary to compensate for the risk of not recovering all or part of the principal, let alone

interest. The interest provision may be one for a default rate of interest which is triggered

when repayment of the loan or payment of an instalment is not made. In a wide variety of

cases a default rate of interest is triggered because some boat or other does not come in, as

hoped. A short-term loan facility which was to be repaid in a month attracts a default rate

of interest and the short-term loan becomes a longer-term loan with the borrower asking for

some accommodation or an extension of its term. These are familiar circumstances. In such

a case high default rates of interest may compound with the ballooning of the original debt.

131 Paciocco and Another v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199, 274 [296]. 132 See Cigno Pty Ltd v Australian Securities and Investments Commission [2020] FCA 479.

28

I encountered such a case called PSAL Ltd v Kellas-Sharpe.133 In accordance with judicial

conduct ethics I am constrained in what I can say about a case which I have decided. I

simply cite the case as an example of a familiar problem in this area.

When judges are asked to apply unconscionability provisions, care is required to not make

assumptions about:

• the typical “consumers” of short-term, high-cost credit, for example, the typical

customers of payday lenders; or

• the ability of individuals and entities who are not “consumers” and subject to the specific

protections of consumer credit laws to protect themselves.

Dr Jodi Gardner’s thesis “How to Approach High-Cost Credit: Looking Beyond Freedom

and Protection” argues that we need to better understand the nature of the high-cost credit

market on both practical and theoretical levels.134 At least in the United Kingdom, there has

been a tendency to blame the users of high-cost credit for their financial difficulties. This

has affected the approach of regulators. According to Dr Gardner, regulators have not

adequately engaged with the high-cost credit market and have falsely assumed market

homogeneity for both borrowers and lenders.135 Her thesis attempts a more accurate

portrayal of the financial position of many high-cost credit borrowers. She draws upon

research of working-class debt which rejects the notion that low-income consumers are

feckless.136 Generalisations or assumptions are often made about the payday loan industry.

Dr Gardner observes that there has been minimal research into the motivations and

circumstances of people using high-cost credit.137 This leads to a simplistic approach to the

regulation of high-cost credit. The issue is framed as one between protection (in the form of

regulatory intervention) and freedom.

Dr Gardner introduces a third concept which is too often overlooked: the provision of welfare

and a social minimum.

To be clear, she does not argue that taking a protective approach is wrong: prohibiting

harmful products, limiting interest and restricting business models may be necessary to

protect vulnerable borrowers.

According to Dr Gardner, if we really want to protect financially vulnerable individuals, we

must do more than merely limit people’s access to certain products or prohibit the most

harmful aspects of the market. We need to understand why certain individuals are reliant on

such expensive and potentially harmful credit.

Consistent with the quest to have a better understanding of the participants in the short-term

credit market, Dr Gardner undertook research including interviews to better understand that

market and the motivations of people who use those products. Three different classes of

borrowers, encompassing six separate lending scenarios, stood out, and were analysed in

order to provide a more informed basis for a targeted regulatory response. The borrower

classes and lending scenarios were summarised as follows:

133 [2012] QSC 31. 134 Gardner, 54. 135 Ibid 55. 136 Ibid 60-61. 137 Ibid 64.

29

1. Financially Secure Borrowers who use the funds obtained:

a. for discretionary expenses – including for travel or luxury items; and

b. for one-off or emergency expenses – for example, a larger than expected bill or

an unexpected expense.

2. Financially Insecure Borrowers, who use the funds obtained:

a. for essential expenses – including rent, food and costs related to children; and

b. to meet existing financial obligations – mainly repaying interest on loans already

incurred.

3. Significantly Impaired Borrowers, including:

a. people with mental health conditions; and

b. people who are compulsive gamblers.

Dr Gardner found that each of the borrower classes had a very different relationship to the

financial products and the lending market.

A key finding was that financially insecure borrowers tended to use the funds from loans for

everyday expenses or to repay existing financial obligations. They were often vulnerable,

financially excluded and could not obtain credit from mainstream providers. They found

themselves often in an untenable financial situation, sometimes described as a debt spiral,

where they were in perpetual loans.138

For such financially insecure borrowers, in need of protection, laws which prohibit their

access to those forms of credit may be seen to provide protection from entering a debt spiral.

Financially insecure borrowers are forced to rely on high-cost credit because of the pre-

existing difficulties and poverty. Merely prohibiting or regulating high-cost credit does not

address the underlying problem. The provision and maintenance of a social minimum is

required. Also, laws and regulations which limit their access to credit can have unintended

consequences for borrowers who are more secure and need short-term credit to address a

temporary liquidity problem.

Social minimums

The extent to which Equity protects consumers of high-cost credit depends on one’s

conception of Equity and, one might say, the century from which one derives guidance as to

the meaning of unconscionable conduct under the unwritten law. Equity scholars are fond

of referring to the fact that its guiding principles are considerably older than the common

law of contract and tort which are largely the products of nineteenth century decisions and

treatises.139 Whether one is concerned with unconscionable conduct in Equity or the law of

contract as surveyed by Atiyah, the natural lawyers of the seventeenth century were

influenced by ideas about just prices and equality in contracting.140

138 Ibid 254. 139 William Gummow, Change and Continuity: Statute, Equity, and Federalism (Oxford University Press,

1999) 89, cited in Leeming, above n 79, 109. 140 Atiyah, 63.

30

Justice Edelman in ASIC v Kobelt observes that in the case of transactions entered by

expectant heirs or reversionists concerning their future or reversionary interests, a

transaction would be set aside by the Court of Chancery unless the other party could prove

that the transaction was fair and reasonable.141 There would be the taking of an “unfair

advantage” or a breach of “the rule of reasonableness” if there was any substantial

undervalue. This liberal approach was altered by statute in 1867 so as to preclude the

reopening or setting aside of such transactions merely on the ground of undervalue.142 Over

time, the concept of what was “unconscionable” narrowed so that claimants had to be subject

to some “special disadvantage” and there had to be a “taking of advantage” of that special

disadvantage. It required much more than the exploitation of an inferior bargaining power.

The Australian authorities required “victimisation” or “exploitation”.143

In the nineteenth century the common law adopted a narrow view about the scope of vitiating

factors such as misrepresentation, non-disclosure, mistake or duress. These vitiating factors

may be available to vulnerable borrowers who rely upon high-cost credit. In the context of

unconscionable conduct as defined in Equity, it may be recalled that Fullagar J in Blomley v

Ryan144 referred to individuals who had a range of weaknesses which included “poverty or

need of any kind”. However, simply being poor and vulnerable was not enough. Nor was

the existence of unequal bargaining power. As Lord Templeman observed, unequal

bargaining power without more does not provide a basis for equitable interference.145

Regulation of credit markets by regulators and courts

Dr Gardner’s thesis encourages us to not think of consumers of high-cost credit as one

homogenous category who are all in need of protection. An evidence-based analysis

suggests that the position is far more complex. Some consumers, like some capitalists, can

afford to repay high interest loans without encountering great financial hardship, and choose

to contract this form of high-cost credit “owing to the ease and convenience of obtaining the

money when compared to more mainstream credit products”.146 They include individuals

and businesses who experience a temporary loss of liquidity or simply need bridging finance.

On the other hand, there are financially insecure borrowers who need protection from

contracts which are unfair and which they have no real choice to enter. Individuals with no

other credit options are obviously vulnerable and prone to agree to whatever terms are

offered. Resort to a high interest short-term credit facility provides temporary relief but risks

pushing them into a debt spiral.

The challenge facing legislatures in designing protective laws and the challenge facing

regulators in exercising powers like the power to make a product intervention order is to

identify the classes to whom protection should be extended and the unintended consequences

of extending protection to individuals or entities who do not need it. Legislatures are much

better equipped than courts to make judgments about the extent of protection which should

be given by law and the economic and other consequences of doing so. They can make

141 (2019) 267 CLR 1, 94 [280]. 142 Ibid 95 [281]. 143 Ibid 95 [282], citing Thorne v Kennedy (2017) 263 CLR 85, 103 [38]. 144 (1956) 99 CLR 362, 405. 145 Boustany v Pigott (1993) 69 P & CR 298 (PC). 146 Gardner, 246.

31

decisions about to whom consumer credit laws should apply and to which kind of

transactions responsible lending obligations should apply.

One consequence of prohibiting the supply of certain forms of credit to borrowers who do

not require protection is described as the “infantilisation” of consumers. Carl Sunstein and

others use this term to describe an overly paternalistic approach to regulation.147 A sufficient

justification should exist for removing a borrower’s free choice to enter a high-cost credit

contract. To proscribe certain kinds of high-cost credit transactions risks robbing individuals

of their autonomy to make choices, take risks and make mistakes. It may also have broader

economic consequences of depriving businesses and entrepreneurs of credit and the

opportunity to increase the overall wealth of our community.

The architectural task facing governments and legislatures is substantial.

One wing of the current edifice of regulation of credit markets is the form of regulation

exercised by courts in applying statutory unconscionability provisions of the kind contained

in the Australian Consumer Law and the ASIC Act. Courts, with less access to information

than Parliaments or regulators, have to make difficult decisions about the kind of credit

transactions which should be proscribed by such a provision. In some, perhaps many, cases

the choice will be obvious because the conduct of the lender will be clearly unconscionable

under those statutory provisions, and would have been unconscionable under the unwritten

law which is Equity. However, in other cases the position will not be so clear.

Who should bear the cost of providing protection to vulnerable borrowers?

Most days we hear public debate about the extent to which the State should provide welfare

in the form of social housing, supporting parents’ benefits and unemployment benefits.

Many economists and welfare groups urge a permanent increase in the level of

unemployment benefits. Others warn that this will deprive farmers of a workforce to pick

fruit. There are many justifications for providing welfare to an extent which allows

individuals a sufficient income to live with dignity. There are social, philosophical, religious

and economic arguments as to why the State should provide a social minimum,

notwithstanding the moral hazards that are associated with a welfare state.

If, however, a social minimum is not provided and individuals resort to high-cost credit for

the essentials of life or unexpected expenses, and such a transaction is set aside as

unconscionable then an interesting issue arises as to who pays for protection. As Dr Gardner

observes, such forms of protection do not solve the underlying problem with redistribution

only occurring “on an ad hoc basis between specific lenders and borrowers”, with borrowers

still having limited financial means and choices.148 She argues that the redistribution should

come from the State in the form of an effective and proactive social welfare system so that

people do not need to turn to high-cost credit in times of need. She also argues that there are

an additional range of responses required including:

• increasing financial control when borrowers experience problem debt;

• providing affordable credit options for low income consumers;

147 Ibid 247-248, citing Cass Sunstein, ‘The Storrs Lecture: Behavioural Economics and Paternalism’ (2013)

122 The Yale Law Journal 1826, 1871; Johnathan Klick and Greg Mitchell, ‘Infantilization by

Regulation’ (2016) 39 Regulation 32, 32. 148 Gardner, 285.

32

• establishing financial hardship regulations that give people flexibility when they suffer

temporary financial difficulties; and

• encouraging a savings culture.149

Professor Fried, an advocate of freedom of contract, argues that the provision of a social

minimum should be society’s general responsibility rather than imposed in an ad hoc way

upon certain lenders:

“Redistribution is not a burden to be borne in a random, ad hoc way by those who

happen to cross paths with persons poorer than themselves. Such a conception,

heartwarmingly spontaneous though it may be, would in the end undermine our

ability to plan and live our lives as we choose. Liberal democracies have chosen to

effect redistribution (to assure a social minimum) by welfare benefits on one hand

and by general taxation based on overall ability to pay on the other. In this way

government, as it seeks contributions to remove inequalities, remains neutral about

the ways in which the better-off acquire their greater wealth, exacting (in principle,

at least) the same contribution from everyone who enjoys the same level of wealth

… The provision of a social minimum should be society’s general responsibility.”150

Similar comments were made in 1990 by Atiyah:

“During the past decade or so the view has been gaining ground, certainly in

England, that these contracts should still be left to the market, while we should try

and control or handle the externalities by other government actions. If a tenant is

too poor to pay an open market rent, then the tenant should receive some state

financial benefit, but the market should be left to operate freely”.151

I commend Dr Gardner’s thesis to you. She looks beyond the two dimensional swing of the

pendulum between freedom of contract and protection. An approach which emphasises

freedom, personal autonomy and the right of individuals to make mistakes by imprudently

entering into high-cost credit transactions makes certain assumptions about the ability of

individuals to make free choices. Laws compelling disclosure of the terms and risks of

entering into such a transaction are of little effect in cases in which an individual lacks any

meaningful choice.

The tradition of protection has ancient origins in our culture and in the Court of Chancery’s

jurisdiction to stop unconscionable conduct and thereby defend the vulnerable. However, as

Dr Gardner points out, because high-cost credit borrowers often have restricted financial

choices, a protection-based approach has its limitations. Even if disclosure laws are

effective, those laws and other laws concerned with procedural fairness only work if a

borrower has a meaningful choice. Laws which aim to protect those individuals and outlaw

transactions which are unfair in a substantive sense are attractive to legislatures, regulators

and courts. However, prohibiting such transactions can have unintended consequences

including inducing individuals who are already in dire financial straits away from regulated

lenders and into the arms of illegal loan sharks.

149 Ibid 289. 150 Charles Fried, Contract as Promise: A Theory of Contractual Obligation (Harvard University Press,

1981) 106. 151 P S Atiyah, Essays on Contract (Clarendon Press, 1990) 360.

33

A key insight by Dr Gardner is that the coercion experienced by financially insecure

borrowers who are forced to enter high-cost credit transactions does not arise from some

mental impairment or special disadvantage such as ill health, illiteracy or lack of

understanding. The underlying cause of the coercion is poverty and a lack of affordable

credit options. Dr Gardner argues that if the State wishes to tackle high-cost credit, it must

address its links with poverty. This raises issues of a government’s obligations to its citizens,

including the obligation to promote and protect the autonomy of individuals to pursue a

meaningful life. She argues that a richer comprehension of freedom and autonomy requires

the law in the context of high-cost credit to move away from the concepts of “freedom versus

protection” or “procedural versus substantial fairness”.152 It requires us to adopt a more

meaningful concept of autonomy to have a social welfare system that delivers a social

minimum.

The provision of a social minimum will avoid many financially insecure borrowers with no

real choice having to resort to high-cost credit and the need to engage laws about

unconscionable conduct in order to relieve them of their contractual obligations.

What values inform judicial choices in the context of unconscionable credit

transactions?

It would be simpler if the values informing the standard fixed by statutory proscriptions

against unconscionable conduct were confined to values which favoured protection such as

honesty, the absence of sharp practice, fairness, disclosure and the protection of the

vulnerable from exploitation. However, if “unconscionable conduct” means conduct that is

“so far outside societal norms of acceptable commercial behaviour as to warrant

condemnation as conduct that is offensive to conscience”, one must have regard to societal

norms which favour holding parties to bargains (even bad bargains) that are freely made,

certainty and predictability in commercial dealings, the pursuit of profit and reasonable

rewards for risk.

In the context of moneylending, the last value has ancient origins. It is tied to ethical ideas

in medieval times, including ideas about just prices and equality in contracting. It is

concerned with a just price for the use of money. Concepts of usury and laws in relation to

usury evolved so as to prohibit transactions that required the payment of interest which was

extortionate or grossly excessive or involved an inequitable bargain in which one party took

unfair advantage of another.

Today, as in medieval times, questions arise as to whether a transaction is unconscionable

because a party in an inferior bargaining position was unable to protect himself or herself

and simply made a “bad bargain”.153

After the Middle Ages, changes in ethics, society, the economy and new philosophies made

courts less inclined to relieve parties of a bad bargain. Today, the policy of holding parties

to bargains in the absence of vitiating factors remain strong. The starting point is that parties

are ordinarily free to contract on whatever terms they choose and the court’s role is to enforce

their bargains.154 In a recent article, Professor Paul Davies has argued that sympathy for the

party which finds itself subject to a bad bargain has led to pressure on courts to find that an

152 Gardner, 299. 153 Maynard v Moseley (1676) 3 Swanst 651, 655. 154 Prime Sight Ltd v Lavrello [2013] UKPC 22; [2014] AC 436, [47] (per Lord Toulson).

34

agreement is not binding; to expand the scope of the vitiating factors; and to liberalise the

principles of interpretation and rectification.155 He argues that courts should not readily bow

to such pressure. Professor Davies reminds us that Lord Nottingham observed that even “the

Chancery mends no man’s bargain”.156

The principle that individuals ordinarily should be free to contract on whatever terms they

choose is deeply embedded in our society and in our law. It reflects important principles of

personal autonomy and personal responsibility for one’s mistakes. It also is grounded in

utilitarian considerations of what is required for the greater good.

Against this background, there is nothing wrong, and much that is right, with laws that

enforce promises freely made. Those laws operate to reward individuals who better assess

risk and make better, more informed, predictions about the future. It may be a prediction

about the future price of eggs, coal or office space. It may be a more informed prediction of

the likelihood of default in a case in which a moneylender contracts a high rate of default

interest with an optimistic borrower who thinks that the occasion for default interest will not

arise: that their boat will come in before the loan needs to be repaid.

As a result, those who do not properly assess risk, including the risk of not being able to

repay a debt when it falls due, ordinarily should not be relieved of the consequences of their

imprudent free choices. Any law which is concerned with societal norms of acceptable

behaviour places a value on freedom of contract and the social importance of enforcing

bargains. A party should have taken the time to think and assess what it was getting itself

into when it decided to contract with Shylock Short Term Loans Pty Ltd.

These values, however, assume that the party had a real choice about whether to contract

with Shylock. They also assume that the party had sufficient intelligence, education and

other advantages in life to be able to freely contract, or was not in such a disadvantaged

position that unfair advantage could be taken of them.

Professor Atiyah’s The Rise and Fall of Freedom of Contract is a monumental work by a

remarkable academic with an abiding interest in the law of contract. In his writings about

the law of obligations, he identified that promise-based liability rests upon a belief in the

traditional liberal value of free choice. He identified conflicting values including values

upheld by the tradition of the Court of Chancery. Like Atiyah, many of us admire the value

of free choice. Writing in 1979, he observed:

“Many still admire these values but they bring with them, inescapably, many other

consequences which are today less admired, especially in England. They bring, in

particular, the recognition that some individuals are better equipped to exercise free

choice than others, through natural aptitude, education, or the possession of wealth.

And the greater is the scope for the exercise of free choice, the stronger is the

tendency for these original inequalities to perpetuate themselves by maintaining or

even increasing economic inequalities. For example, in contracts which really are

risk-allocation arrangements, to hold the contract binding must, in general, favour

the party who has the better skill and knowledge for assessing future risks.”157

155 Paul Davies, ‘Bad Bargains’ (2019) 72(1) Current Legal Problems 253. 156 Ibid 253. 157 Atiyah, 6.

35

Atiyah’s work adopted arbitrary periods. He contrasted intellectual thought and laws in the

periods between 1770 and 1870 and between 1870 and 1970. He took a broad view of

periods of paternalism and also the century in which liberal values of free choice triumphed.

The Rise and Fall of Freedom of Contract was written in the late 1970s when Atiyah sensed

that the pendulum had swung to its furthest point away from the ideology of freedom of

contract. It was at the end of a century associated with the paternalist social philosophy of

the welfare state and a redistributivist economy systems. His book was published in 1979,

a few months after the election of Mrs Thatcher’s first administration. A few years later, in

1981, Professor Fried published Contract as Promise, a Theory of Contractual Obligation,

which promoted a liberal theory of contract and respect for choices.158 That liberal ideal,

according to Atiyah, invokes the idea of a moral obligation because a promisor intentionally

invokes a convention whose function is to give moral grounds for another to expect the

promised performance.159

In 1990, Atiyah published a new chapter in Essays on Contract titled “Freedom of Contract

and the New Right”. Many of us, attracted to visions of swinging pendulums or Boethius’

idea of history as a wheel, may regard the ascendant neo-liberal philosophy of Thatcherism

and the liberal theories of contract which developed after 1979 as a return to the classical

liberal theories of the nineteenth century. Those economic theories led to the ascendancy of

freedom of contract. Today, the abolition of usury laws would be described as deregulation

of credit markets.

Writing in 1990 about the rise of the New Right, Atiyah said that it was difficult to pore over

recent changes in the same way that he had tried to do in his book about 200 years of history.

However, he pointed out a number of respects in which the contemporary scene, despite

superficial appearances, differed profoundly from the situation in the 19th century. He

wrote:

“… the nineteenth-century movement to Freedom of Contract was, politically

speaking, a left-wing movement, closely associated with the movement towards

democracy in England. Radical politicians argued that the people could be trusted

to look after themselves, to see to their own interests, and this led them to reject

paternalism both in law and in politics. The people should be left free to vote, and

to make their own contracts.

Today, of course, Freedom of Contract is a right-wing ideology, and it has largely

lost its close association with democracy.”160

Atiyah added that the nineteenth century radical politicians who argued that the people could

be trusted to look after themselves and others who rejected “paternalism both in law and in

politics” were relying heavily on their optimistic views of the probable effects of mass

education. They recognised that in their own time there were “many socially inadequate

people who would not fare well in the market-place, be ill-educated, mentally weak and

simple, the alcoholics, the elderly and no doubt other groups”.161 Still, these liberal reformers

and advocates of freedom of contract assumed that many of these problems would disappear

158 Fried, above n 150. 159 P S Atiyah, Essays on Contract (Clarendon Press, 1986) 122. 160 Atiyah, above n 151, 357. 161 Ibid 358.

36

with the spread of education. This optimism proved misplaced in a modern age of almost

universal education and literacy. Atiyah wrote in 1990:

“Surely we now know that if people are left to look after their own interests and

make their own choices in the market-place, many of them will not choose wisely.

Consequently, the New Right must be willing to face one of the unpleasant

consequences of Freedom of Contract – namely, that there will always be losers, as

well as winners, and, unfortunately, that the losers will often be the same people in

many different fields of activity.”162

It should not be thought that Atiyah was hostile to the neo-liberal philosophy which had

gained enormous ground by 1990. He expressed “a good deal of sympathy with the ideology

of the New Right” and remarked that:

“… a major problem for those who think as I do is to reconcile much traditional and

apparently paternalistic interference with free contract with this new ideology.”163

In terms of winners and losers, he identified amongst the losers an increasing number of

people who were turned out of their houses because they could not pay mortgage instalments

or had gas or electricity or even water supplies disconnected because they could not pay their

bills. He identified these distressing events as the kind of thing that is “an inescapable result

of the return to Freedom of Contract”.164

At the same time he acknowledged that the New Right are entitled to remind us that losers

are balanced by gainers and that it should not be thought that “the gainers are always rich

capitalists”.165 One reason why there were more mortgage defaulters was that there were

more mortgages and that “lenders as well as borrowers are prepared to take more risks in the

market”.166 Most borrowers would not go into default and so the increasing number of

defaulters had to be balanced against an increasing number of successful and contented

home-owners.

Like many thoughtful individuals, Atiyah recognised the distorting effects on supply and

demand of certain forms of regulation, such as rent controls. If a tenant was in danger of

being thrown out onto the street by the landlord because of an inability to afford to pay an

open market rent, the State should provide some financial benefit or social housing.167

The neo-liberal movement towards deregulation evident in the United Kingdom, the United

States, Australia and other common law jurisdictions has included the deregulation of

financial markets. As I noted at the start, the end of the era of licensed moneylenders and

different forms of regulation of unlicensed moneylenders enabled many small businesses to

start or survive. Unlicensed moneylenders funded a great deal of property development in

this State.

162 Ibid. 163 Ibid 361. 164 Ibid 358. 165 Ibid. 166 Ibid. 167 Ibid 360.

37

Moneylenders are subject to a complex array of regulation. In this country detailed statutory

regulation of different financial services and credit providers is supplemented by a form of

statutory regulation in the statutory proscriptions against unconscionable conduct. Those

provisions were not sufficient to deter the worst excesses revealed by the Hayne Royal

Commission. Still, the statutory proscriptions against unconscionable conduct which are

contained in the Australian Consumer Law and the ASIC Act recognise that the doctrine of

unconscionable conduct, as defined by judges in the middle and the latter part of the

twentieth century, was more constricted than it had been a few centuries earlier. It needed

to be supplemented by statutory provisions which did not set so high a bar before

unconscionable conduct would be found.

One of Atiyah’s interests was in how judges might reflect the values they were taught and

which influenced them as law students, before they became busy as barristers. In his 1990

essay about Freedom of Contract and the New Right, he referred to the countervailing

influence of academics whose views “may powerfully influence the next generation”. He

also referred to judges who, mostly being over the age of 50, would have received “most of

their training and ideas in their youth when the ideology of Freedom of Contract was at a

very low ebb”.168

These remarks make me wonder whether my contemporaries and I might fall into this

category, having received our legal training from Mr Lee and others for free, courtesy of the

abolition of university fees by the Whitlam government. When we come to think about

freedom of contract and also the protection traditionally accorded by Equity, are we still

living in the 70’s? I would hope not. Speaking for myself, it has been impossible not to be

influenced by the ascendant neo-liberal philosophy of recent decades. This includes its

analysis of the distortion caused by some forms of regulation on markets. We realise that

the costs of certain forms of regulation ultimately are borne by those who can least afford it.

My contemporaries and I, as well as many younger judges who received their legal education

during the “Greed is Good” decades, have a deal of sympathy for freedom of contract

principles with their focus on individual liberty and personal autonomy. We seek to

reconcile the principle of freedom of contract with the traditions of the Court of Chancery:

protection and paternalism. I do not detect among my colleagues or in the judgments of

Australian judges that we are divided into two camps, some wearing red robes and favouring

paternalistic interference with free contract, and others wearing blue robes channelling the

late nineteenth century philosophies of Jessel MR about freedom of contract. Each

individual judge on a trial court or on a multi-member appeal court attempts to reconcile

values associated with freedom of contract and legal philosophies associated with regulation

and protection (or to use a pejorative term, paternalism).

Like it or not, we are required to make difficult judgments when asked to decide whether

certain conduct is unconscionable according to the unwritten law which is Equity or

according to statutory proscriptions on unconscionable conduct.

Moneylending legislation introduced in 1900 conferred a jurisdiction upon courts to reopen

moneylending transactions that were “harsh and unconscionable”. Early in the twentieth

century some judges described these provisions as casting a “terrible burden” upon the

168 Ibid 357.

38

judges, as conferring an “embarrassing jurisdiction”, as being “vague” and as not involving

“judicial work”.169 By contrast, Eve J “rejoiced” that he had such a power.170

In my view, the jurisdiction conferred by statutes on Australian judges to decide whether

certain conduct is “unconscionable” is not an occasion for rejoicing or despondency. It

certainly is “judicial work”. The exercise of that jurisdiction should not be a source of

embarrassment unless one is ignorant of the traditions of the Court of Chancery. It is,

however, difficult work.

Let me give a simple hypothetical example. Imagine that there is a moneylending business

that extends high-cost credit to customers who lack security or can only provide inadequate

security. Assume that it lends in a field that does not require it to apply responsible lending

criteria. It does not trouble itself to make, or incur the costs of making, investigations into

the capacity of the borrower to repay. In this kind of business it charges very high interest

rates and attracts borrowers who need money quickly and do not have the option of obtaining

finance from a bank. The lender charges a high rate of interest but will provide some

discount on that interest rate in the absence of default. On its face, the default rate of interest

is extremely high. However, the lender justifies this because of the type of borrowers it

attracts and the high rate of default.

How is a judge to decide whether the rate of interest is so excessive that the transaction into

which a borrower enters involves unconscionable conduct on the part of the lender? In this

line of business the risk of non-payment is high and attempts to recover loans may result in

recovery expenses which produce little or no recoveries. The interest rate charged on loans

does not reflect the lender’s profit. In the context of the reopening provisions of

moneylending legislation it was remarked in 1918 that a moneylender may charge “high

rates of interest in order to make the good pay for the bad”.171 A Victorian judge said:

“It is the business of money lenders to run these risks, and there is nothing unfair in

openly averaging these risks, any more than in the case of insurance companies,

who make the long livers pay for those who die early.”172

In 1916, A T Lawrence J remarked that unless one had regard to the costs incurred by a

moneylender and the extent of bad debts “it is almost impossible to say that any particular

rate of interest is … excessive”.173 These kind of issues arise in the modern context of

deciding whether a rate of interest is so excessive as to constitute unconscionable conduct.

Does a lender with such a business engage in unconscionable conduct because its business

model relies on default interest being routinely charged, with many borrowers being forced

to refinance and incur spiralling debts?

Judges as regulators of finance markets?

Cases involving alleged contraventions of statutory prohibitions on unconscionable conduct

come in all shapes and sizes. Some like ASIC v Kobelt present complex and contestable

evaluations about which the best minds will differ. Some cases about unconscionability and

169 Pannam, above n 42, 277. 170 Kruse v Seeley [1924] 1 Ch 136, 145. 171 Balkind v Ralf [1918] NZLR 929, 934 cited in Pannam, above n 42, 286. 172 Bailey v The New South Wales Mont De Piete Deposit and Investment Co Ltd [1918] VLR 16, 30. 173 Hart v Hungerford (1916) 114 LT 663, 665.

39

credit are far simpler. A borrower will be held to a bad bargain. In a different simple case,

a lender’s conduct may have involved outrageous and predatory exploitation of a vulnerable

borrower. Save in these kind of clear-cut cases, decisions about unconscionable conduct

require evaluation of the whole of the facts of the case and a careful weighing of values

related to freedom of contract and Equity’s tradition of protection. Ultimately, a judge makes

a factually-specific finding about the presence or absence of unconscionable conduct in the

case at hand, and attempts to do justice according to law as between borrower and lender.

Judges exercising the jurisdiction of the Chancery Court have been doing this for centuries.

The more recent dimension of statutory unconscionability raises an issue of how judges

apply a statute which has as its purpose the regulation of commerce. Is it part of the judicial

function in such a case to attempt to assess the consequences of a decision on commerce?

Should a court be concerned that a finding that certain lending practices are unconscionable

will result in credit being withdrawn from a certain market? Should a court attempt to predict

whether a finding of unconscionable conduct in the case at hand will not have that effect,

but instead have the beneficial effect of encouraging similar lenders to improve their

behaviour, and thereby advance the purpose of the statute?

If judges are expected to factor these consequentialist, instrumentalist or policy

considerations into the task of adjudication then an already difficult task becomes harder, if

not impossible.

One reason is that we are judges, not regulators. Generally, we lack the skills and the

information to assess what the consequences of our decisions may be beyond the parties.

We should not act on hunches or assumptions about how our decision, one way or another,

may affect parties who are unknown to us, such as participants in a particular financial

market.174

The origin of the Chancery tradition is said to be the Council in the Tudor period.

Chancellors played a prominent role in the Council’s activities. According to

R.H. Tawney, the Council kept sufficiently in touch with business conditions to know when

the difficulties of borrowers threatened a crisis. The Council resolved individual cases but

was also concerned with regulation of the economy.

We are a long way from those times, during which an example could be made of a lender

who engaged in harsh and unconscionable conduct as a means to influence the availability

of credit in hard times. Modern Australian judges simply do not know enough to predict

whether a decision in a particular case will have the beneficial effect of improving the

general behaviour of lenders and the terms upon which they offer credit or the possibly

unfortunate consequence of depriving borrowers of useful credit in hard times.

It is hard enough to apply the statutory provision and decide the dictates of justice in the case

at hand. We should not be expected at the same time to act as an inadequately informed

regulator of financial markets.

The limits of private law remedies

174 Elsewhere I have written about the problems of judges deciding cases on assumptions and stereotypes:

PDT Applegarth, ‘Deciding Novel and Routine Cases Without Evidence’ (2018) 11(2) Journal of Tort

Law 173.

40

If Australian judges, applying statutes about unconscionable conduct, balancing values of

freedom of contract, protection of the vulnerable and other values, make decisions that

protect borrowers from unfair exploitation, then the statutory purpose is served. However,

even if, like Dworkin’s imaginary Judge Hercules, these judges reach the right decisions in

every difficult case, the result is justice in the particular case at hand, with the possible

incidental benefit of encouraging lenders in that market to behave themselves better in the

future.

Doing justice according to law in a single case is no small thing. It is at the heart of the

judicial function which inherits the protective tradition of Equity and the Court of Chancery.

Still, the result in moneylending cases is largely ad hoc relief for poor or vulnerable

borrowers who can gain access to courts or persuade a regulator to take on their case.

Scholars like Fried, Atiyah and Gardner are surely right to point out that redistribution is not

a burden to be borne in a random, ad hoc way, by individual lenders whose transactions are

called into question in individual cases. The provision of a social minimum should be

society’s general responsibility. Dr Gardner encourages us to think beyond historic

pendulum swings between freedom of contract and protection to the idea of a social

minimum. This requires the development of a modern conception of our collective

responsibility to provide for the welfare of others so they may flourish, and exercise actual

personal autonomy and real choices. Having to choose between feeding one’s family and

entering a high-cost payday loan is no real choice.

The abolition of usury laws was achieved by the same theorists who delivered us the potato

famine in Ireland. They opened the door to rapacious moneylenders and, 50 years later, a

Parliament enacted the Moneylending Acts. In doing so it adopted the language of Equity to

give courts a power to reopen harsh and unconscionable transactions. The theorists who

advocated perfect freedom in contracts and the abolition of legislation in the mid-nineteenth

century advanced rules which, as Byles wrote, were “specious and seducing” in their

simplicity.175 According to Byles, the theorists did not undertake the painful duty of

investigating facts in deciding, based on experience, the particular classes of case to which

the principle of freedom of contract should be applied.

Our modern statutory prohibitions on unconscionable conduct call for the exercise of the

traditions and techniques of Equity and a recognition that in many cases values compete in

determining whether there has been unconscionable conduct.

Attention to the idea of a social minimum is important. If individuals can afford to rent a

habitable dwelling, feed themselves and pay for life’s necessities, then they will not be forced

into imprudent high-cost loans and the risk of being caught in a debt spiral. As a community

we should honour our collective responsibility to provide a modern system of social welfare,

informed by what was good and what was bad about past welfare states. We also have to

think of other ways to build social capital. If we build social capital and more effective

social safety nets, then there will be less call on courts to rescue people from the perils of

unconscionable short-term credit transactions.

Had the decision in ASIC v Kobelt gone the other way by a 4:3 margin, then that would have

had an obvious effect upon the individuals involved in the subject transactions and possibly

175 Byles, above n 26.

41

broader implications for the “book-up” credit system in remote Aboriginal communities.

However, it probably would have had only a marginal effect upon the poverty and

disadvantage of those Indigenous communities. The same may be said about the impact of

judges deciding cases about high-cost credit which is resorted to by individuals in

disadvantaged parts of our cities. There is only so much that individual cases can achieve.

They may protect the poor from unconscionable conduct in particular cases, but they do not

address the underlying causes of poverty. They do not pretend to. They simply apply ancient

equitable doctrines to remedy unconscionable conduct or modern statutes which prohibit

unconscionable conduct, more broadly defined.

The idea that equitable doctrines and statutory prohibitions about unconscionable conduct

can protect the vulnerable from dire poverty and exploitation is a noble one. However,

private law remedies pursued by individual borrowers and strategic proceedings by

regulators against unconscionable lenders are not the best means to overcome deep-seated

inequalities in our society. A better way is to build social capital and repair social safety nets.

If we believe in a fairer and more equitable society, we have to put our money where our

redistributivist mouth is.

It requires us to think about the successes and failures of past welfare states. Informed by

that experience, how might a modern welfare state encourage self-reliance and personal

autonomy? Incidentally, the architect of the British welfare State, the brilliant William

Beveridge, as a young man gave a lecture in Oxford in 1905 is which he asked why it was

that political philosophy had been obscured in public debates by classical economics. A

good question. The same question was posed in 2009 by the late Tony Judt in his lecture

What is Living and What is Dead in Social Democracy.176 Professor Judt wrote about the

need to start talking about inequality again and the injustices of an excessively divided

society: divided by wealth, by opportunity, by outcome. He observed that inequality clearly

corresponds to pathological social problems that we cannot hope to address unless we attend

to their underlying cause. In his work Ill Fares the Land, he wrote:

“Inequality is corrosive. It rots societies from within. The impact of material

differences takes a while to show up: but in due course competition for status and

goods increases; people feel a growing sense of superiority (or inferiority) based

on their possessions; prejudice towards those on the lower ranks of the social

ladder hardens; crime spikes and the pathologies of social disadvantage become

ever more marked. The legacy of unregulated wealth creation is bitter indeed.”177

The collective work and wisdom of hundreds of Australian judges over the last century in

deciding cases about unconscionable conduct is something about which we should be proud.

They carry on a tradition that has its origins in Tudor England and the Court of Chancery.

However, this collective work does not compare with the achievement of reforming

politicians who, in different ways, have addressed issues of poverty, inequality and fairness.

In conclusion, may I mention two: one living and one who died 100 years ago. Both made

our State and our Nation better and fairer. The first is The Right Honourable

176 Tony Judt, ‘What is Living and What is Dead in Social Democracy’ (2009) 17 The New York Review of

Books. https://www.nybooks.com/articles/2009/12/17/what-is-living-and-what-is-dead-in-social-

democrac/ 177 Tony Judt, Ill Fares the Land: A Treatises on Our Present Discontents (Penguin, 2011).

42

William Hayden who, in the 1970s managed, over great opposition, to introduce a system of

universal health care in this country. As Social Security Minister he also introduced a benefit

for “single mothers” who lived in poverty with their children and who were often the victims

of domestic violence. Mr Hayden was also part of a government which abolished university

fees. Although university fees have returned, the social wage and social safety nets which

he and other reformers created endure and enjoy bipartisan support. Those safety nets, and

free universal health care in particular, distinguish our country from the United States.178

The second reformer was, like Tony Lee, a Welsh immigrant: Samuel Griffith. Before he

became a jurist he was a reforming politician with a commitment to making Queensland a

free and fair place in which the wealth created by workers was fairly distributed. As a young

politician, Griffith and others had what Dr David Kemp describes as utopian dreams of social

reconstruction.179

Removing social disadvantage, providing individuals and communities with the work, social

safety nets and opportunities which they need to flourish is the task of governments and

legislatures. Courts will not be called upon so often to rescue the poor and disadvantaged

from high-cost loans if the other arms of government provide a social minimum. That is a

task beyond the power or the legitimate aspirations of even the most powerful court.

178 Tony Judt, above n 176. 179 David Kemp, A free country: Australia’s search for utopia 1861 – 1901 (Miegunah Press, 2019).