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PREFACE As the 2013/2014 Publications Officer, it is my privilege to present the 2014 ALSA Academic Journal. This, the keynote publication produced by ALSA, contains the finalists of the 2014 ALSA National Essay Competition, as well as the winner of the 2014 Paper Presentation Competition. I would like to congratulate Kate Mulvany the winner of the National Essay Competition; and Gordon McBain the winner of the Presentation Competition. I would like to thank the Honourable Chief Justice of the South Australian Supreme Court for marking the National Essay Competition. Michaela Olsson Publications Officer 2013/2014 Australian Law Students’ Association publications@alsa.asn.au

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CONTENTS

Legalising assisted suicide: Looking beyond Self-Determination Kate Mulvany, Monash University .......................................................................... 3 You’ve been tagged! Privacy, freedom of expression and copyright: getting the balance right in the age of Facebook Mandy Milner, Monash University ......................................................................... 19 Giving credit only where credit is due: A proposed statutory solution to overcome the shortcomings of credit rating agency liability Jennifer Wong, Monash University ......................................................................... 73 The national consumer credit reforms and payday lending: moving towards a thicker concept of consumer sovereignty? Maja Cvjetanovic, University of Queensland ........................................................... 117 From Kant to Koskenniemi: De-familiarising language in International Law Gordon C. Mcbain, Bond University ....................................................................... 158

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LEGALISING ASSISTED SUICIDE: LOOKING BEYOND SELF-DETERMINATION

KATE MULVANY

MONASH UNIVERSITY

Over the last two decades, debates regarding euthanasia and assisted suicide have generated greater depth. Previously, discussion appeared polarised according to two views: the primacy of self-determination justifying a right to die; and the belief that such a right would undermine the value of life and threaten vulnerable groups. Now, however, arguments are informed by research conducted in jurisdictions where euthanasia and assisted suicide have been legalised. In Australian jurisdictions, the criminal law prohibits both assisted suicide and euthanasia. This essay argues that both practices should be lawful in the context of suffering. While such reform is justified based on the principle of self-determination, self-determination is not enough alone. It has limits of uncertain extent, including the doctrine of ‘sanctity of life’, it may be criticized as a Western-centric model, and it is difficult to apply in practice. When self-determination is considered in conjunction with other arguments in favour of reform, however, such as narrative ethics, the unsatisfactory state of the current law, and evidence of a euthanasia ‘underground’ in Australia, the need for change is clear. Legislation allowing assisted suicide and euthanasia may not only clarify the law, but promote greater openness on a topic typically not discussed at the individual level. Arguably, such a renewed approach to end of life decisions is imperative in the context of an ageing population and death now characterised by an extended deteriorative decline.

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A shift has occurred in debates regarding euthanasia and assisted suicide. Twenty years ago, arguments appeared polarised according to two views: the primacy of self-determination justifying a right to die; and the belief that such a right would undermine the value of life and threaten vulnerable groups. The argument has progressed as some jurisdictions have formally legalised assisted dying. 1 Now, advocates for the practice can look to research from such jurisdictions and assert that predictions of society undervaluing life and the vulnerable have not eventuated. This does not mean, however, that self-determination trumps all. The following analysis will demonstrate that to claim that competent adults are entitled to choose how they should die solely based on self-determination is overly narrow. While self-determination strongly supports assisted dying, it is not enough alone. Assisted dying should be legalised, but a deeper understanding of individual contextual issues and the current state of the law is required beyond simple claims to autonomy. Based on this approach, both voluntary euthanasia and assisted suicide should be lawful in the context of suffering. For the purposes of discussion, the term ‘assisted dying’ refers to both voluntary euthanasia, where to relieve suffering a person performs an action with the intention of ending the life of another person who has requested the action,2 and assisted suicide, where a competent person dies after being provided by another with the means or knowledge to kill himself or herself.3 Analysis will firstly establish that self-determination alone does not equate to a right to assisted dying, prior to identifying why the practice should be legalised.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1 For example: Rights of Terminally Ill Act 1995 (NT), prior to invalidation; Death With Dignity Act 1994 (Oreg); Termination of Life on Request and Assisted Suicide (Review Procedures) Act 2001 (Nld); Washington Death With Dignity Act 2008 (Wash); Swiss Penal Code, Art 115; (Act on Euthanasia 2002 (Bel). 2 B Douglas, L Willmott and B White, ‘The right to choose an assisted death’ (Report, Australia21 Ltd, January 2013) <http://www.australia21.org.au/publications/press_releases/13/Apr/d15a2c922442b1985c218a91f4fb4f02.pdf> 10. 3 Ibid.

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Self-determination is not enough alone Self-determination is often regarded as equivalent to autonomy, independence and self-rule.4 Theories on the principle are diverse, but commonly hold that a free and voluntary choice made by an individual with regard to themselves should not be interfered with.5 As espoused by Mill, ‘over himself, over his own body and mind, the individual is sovereign’, and power can only be exercised over a person if it is to prevent harm to others.6 As such, proponents argue that assisted dying is ultimately

justified because it is a self-regarding victimless action from an individual decision in

a matter which affects individuals alone.7

Difficulties with such an approach arise, however, on three bases: the right is not absolute; it is founded on Western values; and it is problematic to apply in practice. i) Self-determination is not absolute An unlimited form of self-determination holds that every competent person is entitled to assisted dying regardless of their circumstances, providing their decision is free and voluntary. This resonates with Nitschke’s concept of universal access, conveyed metaphorically as the ‘peaceful pill’ being available in supermarkets.8 Self-determination, however, is not absolute.9 As Richter has identified, ‘one’s decision to die affects others’10 and society has an interest in preserving life.11 Two interests have been particularly prominent in commentary: the interests of doctors and the state.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!4 Leen van Brussel, ‘Autonomy and Dignity: A discussion on Contingency and Dominance’ [2012] (July) Health Care Analysis <http://link.springer.com.ezproxy.lib.monash.edu.au/article/10.1007/s10728-012-0217-0> 3. 5 Katrina George, ‘Autonomy and vulnerability at the death bed’ (2006) 10 University of Western Sydney 139, 142. 6 see Sascha Callaghan and Christopher Ryan, ‘Refusing medical treatment after attempted suicide: Rethinking capacity and coercive treatment in light of the Kerrie Wooltorton case’ (2011) 18 Journal of Law and Medicine 811, 813; see Neil Brown, ‘The ‘Harm’ in Euthanasia’ (1996) 68(3) The Australian Quarterly 26, 32. 7 Peter Baume, ‘Voluntary Euthanasia and Law Reform’ (1996) 68(3) The Australian Quarterly 16, 17. 8 Michael Cook, ‘In Nitschke’s Hands’ (2005) 80 Arena Magazine 36, 37. 9 see Julia Werren, Necef Yuksel and Saxon Smith, ‘Avoiding a fate worse than death: An argument for legalising voluntary physician-based euthanasia’ (2012) 20 Journal of Law and Medicine 184, 190; Michael Ashby, ‘Hard Cases, Causation and Care of the Dying’ (1995) 3 Journal of Law and Medicine 152, 155; Mirko Bagaric, ‘Euthanasia: Patient Autonomy Versus the Public Good’ (1999) 18(1) University of Tasmania Law Review 147, 149. 10 Robert Richter, ‘Euthanasia law: ambiguity, confusion and moral responsibility’ (2001) 58/59 Australian Rationalist 10, 10. 11Kumar Amarasekara, ‘Euthanasia and the Quality of Legislative Safeguards’ (1997) 2(1) Monash University Law Review 1, 42; Werren, above n9, 189; Cameron Stewart, ‘Euthanasia and Assisted

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It has been asserted that the doctor-patient relationship may be undermined if doctors administer assisted dying.12 Doctors may be perceived as ‘executioners’,13 and concerns have been raised that ‘hospitals should not become abattoirs’. 14 Certainly, the Australian Medical Association (‘AMA’) believes that doctors should not be involved in ‘interventions that have as their primary intention the ending of life’. 15 This view can be contrasted with some doctors, however, who report ‘impotence, shame and guilt’ at not being able to assist patients who are suffering,16 and views in the Netherlands where courts have previously recognised a doctor’s duty to relieve unbearable pain even in the context of killing.17 It has been argued that as Australian doctors already participate in death hastening decisions and would not be bound to perform assisted dying, the doctor-patient relationship would not be undermined by lawful assisted dying. 18 This also appears implied by Australian opinion polls that strongly support physician assisted dying. 19 Some systems, however, display a cautious approach to the role of doctors. In Oregon, for example, doctors are able to prescribe medications that hasten death but not administer them, so that they are detached from the ‘harm’ incurred upon the patient.20 As such, patients unable to complete their own administration cannot participate, and self-determination concedes some ground to the principle of non-maleficence –that doctors should do no harm. Ultimately, different assumptions have been made by groups such as the AMA, the judiciary in the Netherlands and legislature in Oregon regarding the impact of assisted dying upon the doctor-patient relationship. What is evident, however, is that little research has been undertaken to test these

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Suicide’ in Ben White, Fiona Mcdonald and Lindy Willmott (eds), Health Law in Australia (Thomas Reuters, 2010) 444. 12 Greg Gardiner, Bella Lesman, Claire Higgins, Rachel Macreadie and Adam Delacorn, ‘Medical Treatment (Physician Assisted Dying) Bill 2008’ (Current Issues Brief No. 2, Parliamentary Library, Parliament of Victoria, 2008), ; Douglas, above n2, 14; Bagaric and Amaraskeraa 2002 13 Gardiner, above n12, 21. 14 Victoria, Parliamentary Debates, Legislative Council, 20 August 2008, 3210 (Bernie Finn). 15 Douglas, above n2, 17. 16 Gardiner, above n12, 17. 17 see discussion of Alkmaar Case in Mirko Bagaric and Kumar Amarasekara, ‘Euthanasia: Why it Doesn’t Matter (Much) What the Doctor Thinks and Why There is No Suggestion that Doctors Should Have a Duty to Kill’ (2002) 10 Journal of Law and Medicine 221, 224. 18 Werren, above n9, 189; Riaz Hassan, ‘Euthanasia and the medical profession: an Australian study’ (1996) 31(3) Australian Journal of Social Issues 239, 241. 19 Douglas, above n2, 8. 20 Werren, above n9, 194.

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assumptions. As such, uncertainty surrounds the validity of this limit to self-determination. The second interest that may limit self-determination is that of the state. The state’s interest in the preservation of life is founded upon the ‘sanctity of life’ principle, which holds that human life is inviolable.21 The value of life is perceived to be in life itself, not the quality of life. 22 Subsequently, although suicide may be decriminalised,23 states are reluctant to recognise a positive right to assisted dying.24 The sanctity of life has religious origins,25 and consequently, some advocates for assisted dying have rejected its place in increasingly secular societies.26 The principle has also has a secular basis, however, as a ‘communal recognition of the fact that we have to respect and protect our fellow humans by seeking to enhance the value and enjoyment of life’. 27 Furthermore, it has been afforded legal recognition in Australia. 28 As such, to dismiss it simply due to its religious origins appears inappropriate. There are signs, however, that the law is shifting away from the sanctity of life principle. This is notable regarding attempted access to assisted dying by people with severe disabilities and lawful withdrawal of medical treatment. Attempts have been made, based on human rights law, to claim a right to die by individuals suffering severe disabilities. For example, in the Canadian case Rodriguez v British Columbia,29 the claimant asserted that she was being discriminated against because although suicide was legal, it could only be performed by able-bodied individuals. As such, she argued that lawful assistance to die should be available. The claim was narrowly rejected, as was a similar case in the United Kingdom.30 More recently, however, human rights arguments have justified clarification of the policy of

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!21 Ibid, 189. 22 Ibid. 23 Crimes Act 1958 (Vic) s6A. 24 Pretty v Director of Public Prosecutions and Secretary of State for the Home Department [2002] 1 AC 800; Purdy, R (on the application of) v Director of Public Prosecutions [2009] UKHL 45. 25 Lorana Bartels and Margaret Otlowski, ‘A right to die? Euthanasia and the law in Australia’ (2010) 17 Journal of Law and Medicine 532, 552. 26 Douglas, above n2, 5. 27 Richter, above n10, 13; Werren, above n9, 189. 28 Harriton v Stephens (2006) 226 CLR 52. 29 (1993) 82 BCLR (2d) 273. 30 Pretty v Director of Public Prosecutions and Secretary of State for the Home Department [2002] 1 AC 800.

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prosecution regarding the prohibition of assisted suicide in the United Kingdom.31 Also, in Canada, a recent judgement recognised that a total prohibition on assisted dying infringed the rights to life, liberty and security of person and equality.32 Notably, the case involved issues beyond self-determination, such as the presence of ‘intractable suffering’. 33 Similar shifts away from the sanctity of life have not occurred in Australia, however, possibly due to the lack of robust human rights instruments. Lawful withdrawal or refusal of medical treatment also challenges traditional notions of the sanctity of life. A competent individual may refuse treatment, even where such a request will result in their death.34 In such circumstances, ‘the principle of the sanctity of human life must yield to the principle of self-determination’.35Advocates of assisted dying subsequently assert that this approach should similarly apply to requests for hastened death via a positive act.36 Morgan and Veitch argue however, judicial withdrawal of treatment decisions are not simply a technical assessment of a patient’s right to choose, but involve consideration of the individual more generally.37 Purportedly neutral tests of competence regarding the patient’s ability to balance risks, are said to generate discussion regarding relevant contextual information, including any suffering that the patient is experiencing.38 In Re B (an adult: refusal of medical treatment)39 the court seemingly considered the patient’s character and required such discussion, beyond a ‘bare explanation of the risks and benefits of medical treatment’,40 given the gravity of the decision to withdraw treatment.41 Similarly in Re T, 42 Lord Donaldson acknowledged that ‘the more serious the decision, the greater the capacity required’,43 indicating that the nature of the decision influences how a test upholding the right to self-determination is applied. As

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!31 Purdy, R (on the application of) v Director of Public Prosecutions [2009] UKHL 45. 32 Carter v Canada (Attorney General) 2012 BSC 886. 33 Carter v Canada (Attorney General) 2012 BSC 886 [15], [24]. 34 Re B (Adult: Refusal of Medical Treatment) [2002] 2 All ER 449; Brightwater Care Group v Rossiter [2009] WASC 229; Hunter and New England Area Health Service v A (2009) NSWLR 88. 35 Airedale National Health Service Trust v Bland [1993] AC 789, 864 (Lord Goff). 36 Douglas, above n2, 5. 37 Derek Morgan and Kenneth Veitch, ‘Being Ms B: B, Autonomy and the Nature of Legal Regulation’ (2004) 26 Sydney Law Review 107, 129. 38 Ibid, 120. 39 Re B (Adult: Refusal of Medical Treatment) [2002] 2 All ER 449. 40 Morgan, above n37, 122. 41 Ibid. 42 Re T [1992] 4 All ER 649. 43 Ibid, [28].

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such, by upholding requests to refuse treatment courts are shifting away from the sanctity of life principle, but this movement is not simply due to rigid application of the test for competence. A more subtle approach is used in the context of life and death decisions, which may consider wider issues such as the patient’s character and justifications.44 This depth, however, is not always observed. In the Australian case of Brightwater v Rossiter,45 for example, the court appeared merely to defer to the opinion of medical experts regarding competence. Arguably though, such deferral is inappropriate and may reflect avoidance of the difficulties inherent in delineating the test of capacity and self-determination in practice. In summary, the law is shifting away from the principle of sanctity of life. It can be seen, however, that the path is far from clear. Regarding claims by people with severe disabilities and withdrawal of treatment there is a tendency for courts to consider the individual more broadly, either via suffering thresholds or the veneer of the individual’s decision-making process, rather than simply determining an individual’s competence to choose. ii) Self-determination is based on Western values Self-determination initially gained prominence after the Enlightenment and French revolution. 46 More recently, however, increased emphasis on autonomy in the medical arena in Western countries has been fuelled by bioethics and the theory of principlism.47 The associated supremacy of self-determination, rather than more communal values, may reflect the ‘dominance of United States political and cultural individualism’.48 As such, deferring to self-determination as the paramount value regarding end of life decisions may not be appropriate in all societies.49 For example, Kwon and Shin have identified that in Korea, societal attitudes toward patient

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!44 Morgan, above n37, 130. 45 Brightwater Care Group v Rossiter [2009] WASC 229. 46 van Brussel, above n4, 3. 47 Morgan, above n37, 127; J McCarthy, ‘Principlism or narrative ethics: must we choose between them?’ (2003) 29(2) Medical Humanities 65, 66. 48 Malcolm Parker, ‘Medical and Health Ethics’ in Ben White, Fiona Mcdonald and Lindy Willmott (eds), Health Law in Australia (Thomas Reuters, 2010) 45. 49 Phillipa J Malpas, Kay Mitchell, Malcolm H Johnson, ‘I wouldn’t want to become a nuisance under any circumstances”—a qualitative study of the reasons some healthy older individuals support medical practices that hasten death’ (2012) 125(1358) Journal of the New Zealand Medical Association 5256.

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autonomy are influenced by the socioeconomic burden on the family.50 In Korea, ‘family harmony is recognized as taking priority over individual interests, and family members play a significant role in medical decision making’.51 Surveys indicated that although patient autonomy was initially respected in the context of end of life decisions, over half the respondents changed their position to the family as the key decision maker when substantial socioeconomic burden was perceived.52 Arguably, in pluralistic societies more exploration of such attitudes and values is needed rather than presumed deferral to self-determination. iii) Self-determination is problematic to apply in practice Health care ‘cannot be conducted in an autonomous vacuum’.53 While advocates of self-determination suggest that individuals can competently choose to die without external interference, this is questionable in practice.54 The presence of factors such as depression, confusion, suffering or a feeling of burden may displace the presumption of autonomy.55 These concerns have led to suggestions by opponents of assisted dying that vulnerable sections of society, such as the elderly or severely disabled, will be both indirectly and directly coerced into dying if the practice is legalised.56 The voices of the disabled and elderly are ‘seldom heard’ in assisted dying debates, 57 and there has been little research exploring their attitudes toward the practice.58 The research that has been undertaken though, indicates that people with disabilities support lawful assisted dying to a similar extent as the general population.59 Healthy elderly people who support assisted dying, however, do so due

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!50 YC Kwon and DW Shin, ‘Impact of perception of socioeconomic burden on advocacy for patient autonomy in end-of-life decision making: a study of societal attitudes’ (2009) 23 Palliative Medicine 87. 51 Ibid, 88. 52 Ibid, 90. 53 Ashby, above n9, 155. 54 Gerald Dworkin, ‘Should Physician-Assisted Suicide Be Legalised?’ in D Birnbacher and E Dahl (eds), Giving Death a Helping Hand (Springer, 2008) 7; Bagaric, above n9, 153. 55 Bagaric, above n9, 153; Gardiner, above n12, 16. 56 Bagaric, above n9, 154; Julia Medew, ‘Assisted suicide the path to Nazism: Right to Life’, The Age (Melbourne), 4 April 2013; Iona Heath, ‘What’s wrong with assisted dying’ (2012) 344 British Medical Journal e3755 < http://www.bmj.com/content/344/bmj.e3755>; see also Werren, above n9, 189. 57 Erik Leipoldt, ‘Euthanasia in Australia: Raising a disability voice’ (2010) Australian Policy Online < http://apo.org.au/sites/default/files/Euthanasiadisabilityvoice111110_0.pdf> 58 Roger S. Magnusson, ‘The Traditional Account of Ethics and Law at the End of Life –and its Discontents’ (2009) 6 Bioethical Inquiry 307, 316. 59 Erik Leipoldt, ‘Good life in the balance: a cross-national study of Dutch and Australian disability perspectives on euthanasia and physician-assisted suicide’ (PhD Thesis, Edith Cowan University, 2003) 273.

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to concerns about future dependency and becoming a burden.60 This may support claims that they will experience indirect pressure to participate in assisted dying. Research from the Netherlands61 and Oregon,62 however, demonstrates that groups typically identified as vulnerable are not participating in assisted dying at levels greater than the general population. In fact, in Oregon, the typical individual accessing assisted suicide is a middle-aged well-educated man.63 While such research identifies trends in access at a macro-level, potential vulnerability at an individual level is not explored.64 As emphasised by George, ‘every decision for assisted death occurs in a particular context’.65 Middle-aged, educated men, for example, may be subject to more nuanced burdens and vulnerability, as reflected by a patient with advanced cancer:

I see myself deteriorating in front of my parents and wife and child and I really don’t

want to do that. I would just much sooner accept it ahead of time and go out.66 Although there are legal frameworks to detect the presence of undue influence or pressure, in the context of dying, ‘claims to autonomy can be particularly ambiguous’. 67 Focusing on traditional concepts of self-determination may not generate the type of analysis required to detect the broader issues at stake. Guidelines for the practice of assisted dying, for example, tend to highlight diagnosis and competency rather than dependency, relationships, stigma, guilt, cultural

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!60 Malpas, above n49. 61 Judith Rietjens, Paul van der Mass, Bregje Onwuteaka-Phillipson, Johannes van Delden and Agnes van der Heide, ‘Two Decades of Research on Euthanasia from the Netherlands. What Have We Learnt and What Questions Remain?’ (2009) 6 Bioethical Inquiry 271, 279; Janna Thompson, ‘Right time to die: why rational suicide should be legalised’, The Conversation, 5 April 2013 < http://theconversation.com/right-time-to-die-why-rational-suicide-should-be-legalised-13208>. 62 Oregon Public Health Division, Death With Dignity Act Annual Report: Year 15 (16 January 2013) <http://public.health.oregon.gov/ProviderPartnerResources/EvaluationResearch/DeathwithDignityAct/Documents/year15.pdf>; Linda Ganzini and Edgar Dahl, ‘Physician-Assisted Suicide in Oregon’ in D Birnbacher and E Dahl (eds), Giving Death a Helping Hand (Springer, 2008). 63 Ibid. 64 Jeremy Prichard, ‘Euthanasia: A reply to Bartels and Otolowski’ (2012) 19 Journal of Law and Medicine 610, 613. 65 George, above n5, 148. 66 Rinat Nissim, ‘In the Land of the Living/Dying: A Longitudinal Qualitative Study on the Experience of Individuals with Fatal Cancer’ (PhD, Thesis, York University, 2008), 113. 67 George, above n5, 155.

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practices and financial issues. 68 Additionally, health professionals often underestimate the sense of burden felt by terminally ill patients.69 As such, to respect an individual’s right to self-determination, and both confidently and accurately find that their decision to die is not compromised by external interference may be difficult in practice. In the context of assisted death, basing justification for lawful practice solely on self-determination is problematic. It is subject to limits of uncertain extent, may be criticised as a Western-centric model, and the theoretical ‘decision free from external interference’ may be difficult to delineate in reality. This does not mean, however, that assisted dying should be prohibited. When self-determination is recognised within a broader range of factors, a strong argument for lawful assisted dying can be made. Assisted dying should be legalised Three key arguments support lawful assisted dying: recognition of the role of narrative ethics; the unsatisfactory state of the current law; and the existence of unlawful assisted dying practice. i) Recognition of the role of narrative ethics While principlism (autonomy in particular), has been a dominant force in medical ethics over the past 30 years, narrative ethics is gaining increasing support.70 Parker refers to narrative ethics as drilling

down to the actual experiences and situations of those whose lives are dealt with in

too abstract a fashion by the broad concepts of principlism.71

The first person narrative is considered a rich medium for qualitative data about individual lives, and for making the moral life intelligible.72 Such an approach can !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!68 A Caplan, L Snyder and K Faber-Langendoen, The role of guidelines in the practice of physician-assisted suicide (2000) 132 Annals of Internal Medicine 476; see discussion Magnusson, above n58, 321. 69 Christine J McPherson, ‘Self-perceived Burden to Others: Patient and Family Caregiver Correlates’ (2007) 23(3) Journal of Palliative Care 135. 70 McCarthy, above n47, 67. 71 Parker, above n48, 47.

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enhance existing models of decision-making and potentially provide a means of justifying ethical decisions.73 Additionally, McCarthy argues that rather than being conflicting, both principlist and narrative ethics may enhance ethical decision-making in the health context.74 Although there are challenges in performing research exploring end of life decisions,75 the importance of the individual’s narrative is becoming clear. For example, while surveys may reveal that palliative care is unable to manage all pain,76 qualitative interviews convey the nature of such pain as a complex interaction between physical pain and profound despair; a ‘dark tunnel that is absolute and irreversible, where it is impossible to focus on anything else’. 77 Similarly, appreciation of the dynamics of suffering and fear can be enhanced. While suffering is unique to each person,78 it may involve the ‘terror of a lingering, undignified, incapacitating and painful death’,79 exacerbated by lack of control.80 Such narratives play two vital roles. Firstly, on a case-by-case basis, they may justify lawful assisted dying in combination with respect for the autonomy of a competent individual. Where principlism becomes uncertain in practice, narratives may still justify respect for the individual’s decision. In such a way, the right to self-determination and the narrative of suffering are complimentary. This echoes Syme’s position regarding end of life care, which is based upon two principles:

respect for the autonomy of a suffering person... and the necessity to relieve their

suffering. Neither alone is totally sufficient, but when they combine they are

compelling.81

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!72 McCarthy, above n47, 67. 73 Ibid. 74 Ibid, 63. 75 Nissim, above n66, 11; L Balducci, ‘Death and dying: what the patient wants’ (2012) 23(Supplement 3) Annals of Oncology iii56, iii58. 76 Ashby, above n9, 155; Baume, above n7, 23. 77 Nissim, above n66, 99. 78 Alicia Krikorian, Joaquin Limonero and Jorge Mate, ‘Suffering and distress at the end of life’ (2012) 8 Psycho-Oncology 799. 79 Nissim, above n66, 148. 80 Rafael Montoya-Juarez et al, ‘Psychological responses of terminally ill patients who are experiencing suffering: A qualitative study’ (2013) 50(1) International Journal of Nursing Studies 53. 81 Magnusson, above n58, 322.

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Although legal systems may be hesitant to adopt a subjective assessment of suffering, it is justified based on narrative ethics and the fallibility of using autonomy alone. The second role that narratives play is in helping to create appropriate guidelines to draft or complement legislation. For example, as mental suffering appears to be a prominent factor rather than physical pain alone,82 it is more appropriate to allow assisted dying in the context of ‘suffering’ rather than ‘pain and suffering’. Similarly, if narratives in the broader population evidenced unrelenting suffering in contexts other than the end of life, then arguably restricting assisted dying to terminal patients is unwarranted. Furthermore, although limiting assisting dying to assisted suicide may protect the medical profession, as in Oregon, and afford a greater control to the individual, excluding those who are suffering severely simply because they are unable to physically complete suicide is inappropriate. ii) Unsatisfactory state of the current law In Australia, the criminal law prohibits both assisting suicide and intentionally killing. For example, in Victoria an individual who performs euthanasia may be charged with common law murder, or manslaughter if there are mitigating circumstances.83 An individual who assists suicide, either by aiding, abetting or inciting suicide, may be charged under s6B(2) of the Crimes Act 1958 (Vic). 84 Although such law appears clear, uncertainty arises when it is applied to family members who hasten an individual’s death, and in the context of doctors making end of life decisions. Family members have been prosecuted for hastening the death of competent individuals.85 In such instances, courts have often applied suspended sentences.86 In R v Maxwell87 for example, where the accused hired equipment to gas his wife who was suffering from terminal cancer, an 18 month sentence was fully suspended based on evidence that he had attempted to dissuade her, felt obliged to assist, had pleaded

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!82 Douglas, above n2, 12. 83 Crimes Act 1958 (Vic) s6B. 84 Crimes Act 1958 (Vic) s6B(2). 85 R v Marden [2000] VSC 558; R v ANG [2001] NSWSC 758; R v Hood (2002) 130 A Crim R 473; R v Maxwell [2003] VSC 278; see Bartels, above n25, 544. 86 Ibid. 87 R v Maxwell [2003] VSC 278.

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guilty and showed considerable remorse. 88 This example points to the inappropriateness of inflicting the criminal law on individuals who were acting out of compassion in an extremely difficult situation. As identified by the former director of public prosecutions in New South Wales,

good men and women... should not be left at the mercy of the criminal law for acting

humanely and compassionately, in a principled way and with the informed consent of

the holder of the right to life.89

Arguably, a differing legal framework for assisted dying in the context of suffering is required to prevent such inappropriate exposure to, and use of, the criminal justice system where the law is rarely applied with full force. Application of the law regarding doctors’ decisions during end of life care has been described as hypocritical, ambiguous and confused.90 As mentioned, doctors are lawfully able to withdraw treatment with the knowledge that death will result, but not actively assist death. Courts assert the legal distinction between passively allowing an individual to die naturally through withdrawing treatment that doctors have no duty to provide, and taking active steps to hasten the death.91 Such a distinction has found some moral support.92 Ultimately however, it is tenuous93 and has received criticism as inappropriate splitting of hairs requiring the suspension of disbelief.94 Ambiguity and inconsistency also surround doctors’ ability to lawfully hasten death with painkillers. The doctrine of double effect maintains that it is lawful for a doctor to administer painkillers at doses with the intention of relieving pain, but foreseeing that death will be hastened.95 The doctrine also appears to extend to the use of

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!88 Ibid. 89 Quentin Dempster, ‘Do you have the right to die?’, The Drum, Australian Broadcasting Corporation, (29 November 2011) < http://www.abc.net.au/news/2011-11-29/dempster-do-you-have-the-right-to-die/3702050> 90 Richter, above n10, 14. 91 Bland 92 McGee 2005 (in folder); Douglas 2009; McCabe 2008 93 Airedale National Health Service Trust v Bland [1993] 1 All ER 821, 867 (Lord Goff). 94 Roger Magnusson, ‘The Future of the Euthanasia Debate in Australia’ (1997) 20 Melbourne University Law Review 1108, 1118. 95 R v Adams (Bodkin) (Unreported, Central Criminal Court, Devlin J, 9 April 1957); reported at H Palmer, ‘Dr Adams’ Trial for Murder’ [1957] Criminal Law Review 365

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sedatives in the act of deep terminal sedation.96 Such variations in the law regarding hastening of death by doctors create substantial issues and widespread confusion.97 While most doctors have performed actions intending to hasten death, they will not admit this for fear of liability.98 As such, the doctrine of double effect has been criticised for ‘its naïve reliance on scrupulous physician honesty in the face of prosecution’.99 Medical decisions at the end of life may be considered arbitrary,100 and individuals with similar medical presentations may receive significantly differing outcomes depending on their doctor’s ‘experience, training, beliefs and courage’.101 The law is difficult to enforce,102 doctors are rarely prosecuted,103 and unless family members complain, treatment may not be questioned. 104 As such, doctors are afforded extensive control in end of life decisions, particularly given reluctance in Australia to discuss such issues.105 Certainly, Oddie suggests that it is the illegality of assisted dying that

‘has generated an elite who control when and where we live and die without any

consultation with those effected’.106

As such, although there are concerns that lawful assisted dying may have a ‘slippery slope’ effect, where people may be at risk of having their lives shortened without their knowledge, there is evidence that this is already occurring under the current law.107 Legalising assisted dying can clarify the law regarding end of life decisions and stimulate open discussion about available options, facilitating a shift away from the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!96 Magnusson, above n58, 321; Anne Susskind, ‘Lazy euthanasia law makes life difficult for doctors’ [2008] (October) Law Society Journal 24, 24. 97 Brendan A Thompson, ‘Final Exit: Should the Double Effect Rule Regarding the Legality of Euthanasia in the United Kingdom be Laid to Rest?’ (2000) 33 Vanderbilt Journal of Transnational Law 1035, 1063. 98 Ibid, 1062; Helga Kuhse, ‘From merely ‘letting die’ to ‘helping die’: the case for voluntary euthanasia’ (2001) 58/59 Australian Rationalist 33, 36. 99 Thompson, above n97, 1077. 100 Susskind , above n96, 25. 101 Ibid. 102 Douglas, above n2, 5. 103 Werren, above n9, 184. 104 Susskind, above n96, 24. 105 Douglas, above n2, 16. 106 Graham Oddie, ‘The Moral Case for the Legalisation of Voluntary Euthanasia’ (1998) 28 Victoria University of Wellington Law Review 207, 224. 107 Ibid; Kuhse, above n98; Werren, above n9, 191.

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dominant paradigm of medical paternalism. Doctors typically do not have these discussions with patients,108 even though they are likely to improve an individual’s sense of control at the end of life and contribute to decreased suffering. Furthermore, assisted dying legislation would bring the decisions of doctors under increased legal scrutiny, which would afford both more protection of doctors from liability and identification of dubious decision-making.109 iii) The practice of unlawful assisted dying There is evidence of a euthanasia ‘underground’ in Australia.110 In 1996 it was reported that

it is the rich, powerful and well connected, who... if they have great personal need,

can find one of the 14 % of medical practitioners who undertake voluntary

euthanasia.111

Additionally, Customs seizures of death-hastening drugs have tripled in Australia over the past three years. 112 The unregulated illegal practice of assisted dying generates concerns that both doctors and individuals are exposing themselves to greater risk than would be present in a regulated environment.113 Given underground practice is generally only obtained by well-off individuals, it has been suggested that prohibition leads to inequality of assisted dying access. Such claims, however, are balanced by data that shows even where assisted dying is lawful it is primarily accessed by the wealthy and educated.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!108 Kenneth Hillman, ‘Reflections on dying from an intensive care physician’, The Conversation, 16 November 2012 < http://theconversation.com/reflections-on-dying-from-an-intensive-care-physician-10082>; Paul Saul, ‘A conversation that promises savings worth dying for’, The Conversation, 29 April 2013 < http://theconversation.com/a-conversation-that-promises-savings-worth-dying-for-13710>; Kuhse, above n98, 37. 109 Kuhse, above n98, 37. 110 Magnusson, above n58, 318. 111 Baume, above n7, 23. 112 Sean Parnell, ‘Seizures of euthanasia drugs rise’, The Australian, 11 February 2013 < http://www.theaustralian.com.au/national-affairs/health/seizures-of-euthanasia-drugs-rise/story-fn59nokw-1226574937714> 113 Magnusson, above n58, 318; Gardiner, above n12, 20; Werren, above n9, 191; Alan Rothschild, ‘Oregon: Does physician-assisted suicide work?’ (2004) 12 Journal of Law and Medicine 217, 224.

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Conclusion Assisted dying cannot be justified based on the right to self-determination alone. Self-determination and autonomy are subject to limits, may be questioned as Western-centric, and display some shortcomings when applied in practice. When complimented by narrative ethics, however, a deeper understanding of assisted dying may be generated and justify its legalisation and formation of appropriate guidelines. Furthermore the application of the criminal law regarding end of life decisions is inappropriate, inconsistent and fosters medical paternalism. This, in addition to evidence of a euthanasia underground, points to the current law being insufficient. A competent adult should be able to access assisted suicide and euthanasia in the context of suffering. Legalisation may not only clarify the law, but promote greater openness on a topic typically not discussed at the individual level. Arguably, such a renewed approach to end of life decisions is imperative in the context of an ageing population and death now characterised by an extended deteriorative decline.114

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!114 Magnusson, above n94, 1112; Margaret Pabst Battin, ‘Safe, Legal, Rare? Physician-Assisted Suicide and Cultural Change in the Future’ in D Birnbacher and E Dahl (eds), Giving Death a Helping Hand (Springer, 2008), 40.

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YOU’VE BEEN TAGGED! PRIVACY, FREEDOM OF EXPRESSION AND COPYRIGHT: GETTING THE BALANCE

RIGHT IN THE AGE OF FACEBOOK

MANDY MILNER

MONASH UNIVERSITY

The pervasive use of social networking websites has created a myriad of legal and social issues, both novel and those requiring reapplication. In addition, the ubiquitous nature of smart phones and cheap digital cameras has converted ordinary individuals into amateur photographers. This enables individuals to photographically record the everyday and publicly disseminate photographs at rapid speeds, facilitating free expression. Yet the ability to post photographs of others without permission gives rise to a tension between, on the one hand, this freedom of expression and exercise of the photographer’s intellectual property rights and, on the other, the subject’s right to privacy. This issue is further complicated by the development of technologies, such as facial recognition and “tagging”. Australian law currently lacks a method of producing an appropriate balance between these rights. This paper examines the approaches adopted in the United States and the European Union, which offer some guidance for Australia. In this paper, it is proposed that ultimately what is required is a law which provides an integrated solution specifically tailored for the social networking context.

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1 Introduction In our Internet age, social networking websites such as Twitter and Facebook are extremely prominent, giving rise to a myriad of legal and social issues. These websites enable users to perform various activities including uploading photographs to a personal profile. Facebook, being the most widely utilised,1 will be the focus of this paper, however the issues discussed are applicable to all social networking websites. Most photographs are uploaded by the person who has taken the photograph. This involves an important exercise of freedom of expression and of exclusive rights as a copyright owner. Yet it also raises significant privacy issues to the extent that the photograph contains images of others without consent. This is exacerbated where individuals are “tagged” or otherwise identified.2 As a result, core basic rights have come into conflict.3 However, Australian law currently fails to adequately address this tension or to comprehensively regulate social media. This paper examines the relevant laws in Australia and then provides a brief overview of the position in the United States (“US”) and European Union (“EU”) to offer guidance for developing an Australian solution. It argues that the social media context raises unique legal issues and magnifies the scale of issues arising in equivalent offline contexts. The pervasiveness of social media use and its facilitation of the mass dissemination of information identifies the magnitude of potential consequences arising out of social media use.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1 Following Google, Facebook is the second most commonly visited website, with approximately 43% of Internet users accessing Facebook daily. In early 2013, there were more than 160 million Facebook users in the United States and over 11 million in Australia: Facebook Statistics by Country (2013) Social Bakers <http://www.socialbakers.com/facebook-statistics/?interval=last-week#chart-intervals>; Top Sites, Alexa <http://www.alexa.com/topsites>. 2 When individuals are “tagged” in a Facebook photograph, their names will be displayed on the photograph and the photograph may, depending on their Facebook settings, link to their personal profiles. 3 Historically, courts have grappled with balancing the right to privacy against free expression in relation to photographs of celebrities and against copyright in relation to medical records. Yet with the rapid expansion of the Internet, these issues have become far more commonplace and applicable to ordinary individuals.

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Therefore, it is argued that what is required is a sui generis solution,4 which couples a Code of Conduct applicable to social media users with enforceable provisions targeted at more serious privacy breaches.

2 The Competing Rights and Their Underlying Rationales

I INTRODUCTION Sarah and Pete, long-time friends, are quite drunk at a party. Sarah walks across the room, trips and stumbles. Her pink underwear is exposed below her short black dress. Pete, amused by Sarah’s antics, quickly snaps a photograph on his iPhone of Sarah mid-fall. He instantly uploads it to Facebook, tagging Sarah and adding the headline ‘Another drunken night out with Sarah’. The next morning, with little recollection of that night, Sarah sees the photograph on Facebook and is humiliated. She feels that her privacy has been invaded, yet Pete stubbornly refuses to remove the photograph as he wants to share his nights’ events with his Facebook friends.5 Jane aspires to be recognised as an artist and her whole persona is built around her artistic person. She expends considerable time assembling photographic collages of street scenes that portray messages about human alienation and promotes her artwork on her Facebook page. She uploads a collage depicting Rob amongst a sea of faces. He is unknown to Jane and thus remains untagged. One day, Rob stumbles upon the photograph and feels that it objectifies him. Whilst he is not concerned with any specific harm arising from the publication, he wants the photograph to be deleted.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!4 A sui generis law aims to deal with a specific area of law that is unique and of its own class. 5 To further demonstrate, 19-year-old Chelsea Chaney has brought proceedings against her former US high school for using one of her Facebook photographs without her consent to warn students of Facebook’s dangers. This breached Chaney’s privacy and her family member’s copyright. The school may argue free expression under the fair use exception, which permits reproduction for teaching purposes: Tyler Kingkade, ‘Chelsea Chaney Sues Georgia School District for Using Facebook Photo of Her in a Bikini’, Huffington Post (online), 24 June 2013 <http://www.huffingtonpost.com/2013/06/24/chelsea-chaney-facebook-bikini-photo_n_3487554.html>.

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These situations demonstrate the tensions arising between the competing interests and the need for a balanced approach. The nature of these rights and their inherent conflicts will be considered below. It should be noted that copyright and freedom of expression may themselves conflict where the copyright in a photograph that an individual wishes to upload belongs to a third party. However, resolving this conflict is beyond the scope of this paper.

II PRIVACY Whilst the right to privacy is recognised as a basic human right under international law and the Victorian Charter of Human Rights and Responsibilities (“Victorian Charter”),6 it is difficult to define and delineate the scope of protection which should be afforded to it.7 At any given point in time, society categorises certain activities as absolutely “private”, thus warranting protection from invasion, and others as “public”, requiring no privacy protection.8 Yet the categorisation of activities straddling the fine line between public and private involves inherently subjective determinations, which change over time according to societal and technological developments.9 This paper is concerned with information privacy, that is, the right to control when, how and to what extent personal information is shared with others.10 It argues that this should be protected where information is of no legitimate public interest and its unjustifiable dissemination would cause mental harm, embarrassment or humiliation to a person of ordinary sensibilities.11

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!6 International Covenant on Civil and Political Rights, opened for signature 16 December 1966, 999 UNTS 171 (entered into force 23 March 1976) art 17; Universal Declaration of Human Rights, GA Res 217A (III), UN GAOR, 3rd sess, 183rd plen mtg, UN Doc A/810 (10 December 1948) art 12; Charter of Human Rights and Responsibilities Act 2006 (Vic) s 13. Some other Australian States have similar human rights protection, however this paper will be discussed in the context of Victoria: See, eg, Human Rights Act 2004 (ACT); Tasmanian Bill of Rights Bill 2005 (Tas). 7 Frederick Davis, ‘What Do We Mean By the Right to Privacy?’ (1959) 4 South Dakota Law Review 1, 5; H J McCloskey, ‘Privacy and the Right to Privacy’ (1980) 55(211) Philosophy 17, 17. 8 McCloskey, above n 7, 19. 9 Ibid; Victorian Law Reform Commission, Surveillance in Public Places, Final Report 18 (2010) 72; Davis, above n 7, 6. 10 McCloskey, above n 7, 22-27; William M Beaney, ‘The Right to Privacy and American Law’ (1966) 31(2) Law and Contemporary Problems 253, 254. 11 McCloskey, above n 7, 27.

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Privacy seeks to protect various underlying moral values and instrumental concerns. The right to control one’s personal information is inextricably linked with personal autonomy and liberty over one’s personality.12 Privacy upholds basic dignity and respect for others, by preventing uses of personal information which denigrate the individual, including publication of humiliating photographs.13 Privacy also serves to foster self-construction, which is essential for self-expression and is linked inextricably with modern society’s increasing obsession with self-image. 14 Finally, privacy offers protection from reputational damage, preventing individuals being misjudged out of context.15 Whilst the right to privacy is a historical conception,16 new technologies and societal developments expose novel concerns which intensify privacy invasions.17 Smart phones and cheap digital cameras have converted ordinary individuals into amateur photographers able to haphazardly photograph the everyday and easily disseminate photographs to the online world.18 Moreover, recent technological developments, such as Google Glass and Memoto, enable inconspicuous photography.19 Coupled with facial recognition technologies

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!12 Ibid 25; Glenn Negley, ‘Philosophical Views on the Value of Privacy’ (1966) 31(2) Law and Contemporary Problems 319, 319. 13 Robert C Post, ‘Three Concepts of Privacy’ (2001) 89(6) Georgetown Law Journal 2087, 2092. See Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, [43] (Gleeson CJ). 14 McCloskey, above n 7, 29; Victorian Law Reform Commission, above n 9, 72; Daniel J Solove, The Future of Reputation: Gossip, Rumor and Privacy on the Internet (Yale University Press, 2007) 4; Melissa Miles, ‘Photography, Privacy and the Public’ (2012) Law, Culture and the Humanities 1, 9. 15 Victorian Law Reform Commission, above n 9, 72; Solove, above n 14, 4, 30-1. 16 Various commentators voiced privacy concerns in relation to the development of cameras as early as the 1890s, including Samuel D Warren and Louis D Brandeis who argued that personal photography ‘invaded the sacred precincts of private and domestic life’: Samuel D Warren and Louis D Brandeis, ‘The Right to Privacy’ (1890) 4(5) Harvard Law Review 193, 195; Solove, above n 14, 107. 17 At the same time, technological developments have allowed for the additional protection of privacy, such as encryption, which renders electronic information inaccessible by unauthorised individuals: Australian Law Reform Commission, For Your Information: Australian Privacy Law and Practice, Report 108 (2008) 389. 18 Seth F Kreimer, ‘Pervasive Image Capture and the First Amendment: Memory, Discourse and the Right to Record’ (2011) 159 University of Pennsylvania Law Review 335, 340; Anne Marsh et al, ‘A Right of Privacy and Photography in Public’ (2012) 25(1) Australian Intellectual Property Law Bulletin 13, 13. 19 Google Glass enables a person to take a photograph by simply winking or subtly clicking a button, whilst Memoto is a small camera attached to clothing which automatically takes two

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and tagging,20 these developments render anonymity and control over one’s identity an impossibility.21 This is problematic as humans, by their very nature, behave differently (and with more freedom) when anonymous.22 Even where a tag is removed or a photograph deleted, the biometric data extracted from the photograph is retained for future facial recognition purposes.23 Online information posted by others, both with and without consent, contributes to a person’s ‘NetRep’, which is an online reputation or brand.24 Photographs serve as permanent records, becoming ingrained in the Internet’s ‘elephantine memory’ and easily accessible by those attempting to find them.25 Employers often vet employees’ or potential employees’ Facebook profiles, thus potentially posing direct economic harm.26 Further, it is difficult

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!photographs per minute. Appropriate use of these devices relies upon general social etiquette, yet this is insufficient for adequately protecting privacy: Alexei Oreskovic, ‘Google Glass: Cool or Creepy?’, The Age (online), 21 May 2013 <http://www.theage.com.au/digital-life/digital-life-news/google-glass-cool-or-creepy-20130521-2jxkp.html>; Salvador Rodriguez, ‘Google Glass Can Take Photo With a Wink’, The Age (online), 3 May 2013 <http://www.theage.com.au/technology/technology-news/google-glass-can-take-photo-with-a-wink-20130503-2iwpl.html>; Memoto (2013) Memoto Website <http://memoto.com/>. 20 When a photograph is posted on Facebook, Facebook suggests a name “tag” for those individuals depicted in it, a practice which is problematic as it is facilitated through the collection of identified photographs: Anonymous, ‘Valued Opinions: People are Unsure About Facebook Tag Suggestions Facial Recognition’, Entertainment Close Up (online), 27 July 2011. It has been estimated that in order to operate facial recognition technologies, Facebook’s database has collected more than 100 billion photographs and this is increasing by 300 million photos a day: Norberto Nuno Gomes de Andrade, Aaron Martin and Shara Monteleone, ‘“All the Better to See You With, My Dear”: Facial Recognition and Privacy in Online Social Networks’ (2013) 11(3) IEEE Security & Privacy 80, 80. 21 de Andrade, Martin and Monteleone, above n 20, 81. It is important to note, however, that an individual’s privacy settings will determine whether his or her prior approval is required before a “tag” will be displayed on a photograph. 22 Solove, above n 14, 140-1. See generally Josh Blackman, ‘Omniveillance, Google, Privacy in Public, and the Right to Your Digital Identity: A Tort for Recording and Disseminating an Individual’s Image Over the Internet’ (2009) 49 Santa Clara Law Review 313, 325-6, 342-3. 23 de Andrade, Martin and Monteleone, above n 20, 82. 24 Australian Law Reform Commission, above n 17, 2237. 25 Anupam Chander, ‘Youthful Indiscretion in an Internet Age’ in Saul Levmore and Martha C Nussbaum (eds) The Offensive Internet: Speech, Privacy and Reputation (Harvard University Press, 2010) 124, 125; Ariella Goldstein, ‘Privacy From Photography: Is There a Right Not to be Photographed Under New York State Law?’ (2008) 26(1) Cardozo Arts & Entertainment Law Journal 233, 265. Solove describes our society as “Generation Google” where “to Google” has become a verb and anything can be found by “Googleing” it: Solove, above n 14, 9. 26 See generally Dominic McGoldrick, ‘The Limits of Freedom of Expression on Facebook and Social Networking Sites: A UK Perspective’ (2013) 13(1) Human Rights Law Review 125, 139-49; Australian Law Reform Commission, above n 17, 108, 461; Marnie Banger, ‘Young Ones: Your Online Reputation Is, Like, Forever’, The Age (online), 5 September 2013 <http://www.theage.com.au/digital-life/digital-life-news/young-ones-your-online-reputation-is-like-forever-20130904-2t4md.html>.

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to retain control over photographs as they may be copied to other websites or Facebook pages, or saved onto computers. This digital record is a constant reminder of past indiscretions, challenging the ability to experiment and grow without constraint from the past.27 The Internet facilitates close scrutiny and continuous observation of this record, as opposed to fleeting offline observations, enabling viewing by unforeseen audiences.28 These considerations demonstrate the importance of crafting appropriate legal mechanisms to ensure privacy is protected in a way that is suited for the social media context. Solove argues that modern thinking must replace outdated conceptions of privacy to ensure the law responds to societal developments.29

III COPYRIGHT ‘User-created content’ can easily be uploaded on the Internet,30 with Facebook providing a medium for amateur artists to widely disseminate their artwork. Generally, individuals who upload photographs will have personally taken those photographs, therefore owning the copyright in them. Copyright confers on an owner a bundle of exclusive rights, including the right to exclusively disseminate one’s work.31 Copyright legislation serves two main purposes. The first is utilitarian or economic,32 as copyright protection provides a commercial incentive to create and disseminate creative works by rewarding authors’ contributions towards

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!27 Daniel J Solove, ‘Speech, Privacy and Reputation on the Internet’ in Saul Levmore and Martha C Nussbaum (eds) The Offensive Internet: Speech, Privacy and Reputation (Harvard University Press, 2010) 15, 16-8; Solove, above n 14, 17, 72-3. 28 Standing Committee of Attorneys-General, Unauthorised Photographs on the Internet and Ancillary Privacy Issues, Discussion Paper (July 2005) 12-3. 29 Daniel J Solove, above n 27, 15, 19. 30 ‘User-created content’ has been defined as content with a certain amount of creative effort made available on the Internet by individuals, with no professional association: Organisation for Economic Co-Operation and Development, Participative Web and User-Created Content: Web 2.0, Wikis and Social Networking (2007) 9. 31 Copyright Act 1968 (Cth) s 31. 32 Mark J Davison, Ann L Monotti and Leanne Wiseman, Australian Intellectual Property Law (Cambridge University Press, 2nd ed, 2012) 186.

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society.33 The assurance of legal protection against copying encourages the investment of time, money and effort in creating works.34 The second rationale is rights-based; that authorship should confer rights which protect the creation and product of the author’s mind and aspects of the culture and society in which the author exists.35 This rationale is most evident in the protection of moral rights in the copyright regime, which are non-economic, personal rights protecting an author’s personality as expressed in the work.36 This rationale is increasingly important in the digital context where works can easily be saved and reproduced by others, undermining the author’s integrity and personality.37 This is closely aligned with a natural rights argument, which recognises that it is fair to grant rights as the work is a product of the individual.38 Copyright differs from privacy and freedom of expression in that it has not been traditionally recognised as a human right and is not recognised as such under the Victorian Charter. 39 However, it is arguable that copyright is increasingly beginning to resemble a human right by protecting personal and moral rights, imbuing it with the same status as that of privacy and freedom of expression. Recognising copyright as a human right is supported by various Conventions to which Australia is a signatory, which state that individuals

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!33 Ibid 3; Laura A Heymann, ‘How to Write a Life: Some Thoughts on Fixation and the Copyright/Privacy Divide’ (2009) 51 William and Mary Law Review 825, 832; Alina Ng, ‘When Users are Authors: Authorship in the Age of Digital Media’ (2010) 12(4) Vanderbilt Journal of Entertainment and Technology Law 853, 853. For a full discussion of the utilitarian argument, see generally Robert L Ostergard, ‘Intellectual Property: A Universal Human Right?’ (1999) 21(1) Human Rights Quarterly 156, 163-5. 34 Davison, Monotti and Wiseman, above n 32, 3. 35 Paul L C Torremans, ‘Is Copyright a Human Right?’ (2007) (1) Michigan State Law Review 271, 274; Heymann, above n 33, 833. 36 Iona Harding and Emily Sweetland, ‘Moral Rights in the Modern World: Is it Time for a Change?’ (2012) 7(8) Journal of Intellectual Property Law and Practice 565, 565. See generally Copyright Act 1968 (Cth) pt IX. Moral rights grant individuals a right of attribution, a right to not be falsely attributed and a right of integrity. 37 Ng, above n 33, 856-8. This problem was pre-conceived by Benjamin Kaplan in 1966, who suggested that copyright is likely to lose relevance in the future, whereby measures which withhold access would become far less relevant: at 858-9. 38 Davison, Monotti and Wiseman, above n 32, 188; Torremans, above n 35, 274. This likens copyright to material property rights. 39 The Victorian Charter only refers to protection of one’s property: Charter of Human Rights and Responsibilities Act 2006 (Vic) s 20.

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have the right to ‘protection of the moral and material interests resulting from any... artistic production of which he is the author’.40

IV FREEDOM OF EXPRESSION As with the right to privacy, freedom of expression is acknowledged as a human right internationally and under the Victorian Charter.41 It is, however, generally treated as a right which should limit the scope of laws impinging on its exercise, rather than one which can be positively asserted. Self-expression involves sharing one’s thoughts and beliefs with others, which is central to individual freedom.42 Digital technologies and the Internet have posed new challenges for the law in this area, 43 whilst simultaneously facilitating free expression as demonstrated by the magnitude of content uploaded onto social networking websites.44 Freedom of expression has three basic underpinnings, which are central to a democratic society.45 First, freedom of expression facilitates an unrestrained marketplace of ideas.46 This leads to the realisation of the “truth” and is

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!40 Universal Declaration of Human Rights, GA Res 217A (III), UN GAOR, 3rd sess, 183rd plen mtg, UN Doc A/810 (10 December 1948) art 27(2); International Covenant on Economic, Social and Cultural Rights, opened for signature 16 December 1966, 999 UNTS 3 (entered into force 3 January 1976) art 15(1)(c). 41 Universal Declaration of Human Rights, GA Res 217A (III), UN GAOR, 3rd sess, 183rd plen mtg, UN Doc A/810 (10 December 1948) art 19; International Covenant on Civil and Political Rights, opened for signature 16 December 1966, 999 UNTS 171 (entered into force 23 March 1976) art 19(2); Charter of Human Rights and Responsibilities Act 2006 (Vic) s 15. 42 Heejung S Kim and David K Sherman, ‘“Express Yourself”: Culture and the Effect of Self-Expression on Choice’ (2007) 92(1) Journal of Personality and Social Psychology 1, 1-2. 43 For example, a recent issue arose in the US case Bland v Roberts, where it was held that a Facebook “like” (which involves putting a thumbs-up on Facebook content) may be protected by the US First Amendment as it qualifies as a substantive statement: (4th Cir, No 12-1671, 18 September 2013) slip op 39 (Traxler J). 44 Jack M Balkin, ‘Digital Speech and Democratic Culture: A Theory of Freedom of Expression for the Information Society’ (2004) 79(1) New York University Law Review 1, 13, 33; Althaf Marsoof, ‘Online Social Networking and the Right to Privacy: The Conflicting Rights of Privacy and Expression’ (2011) 19(2) International Journal of Law and Information Technology 110, 111. 45 See generally Raymond Finkelstein and Matthew Ricketson, Submission to Minister for Broadband, Communications and the Digital Economy, Report of the Independent Inquiry Into the Media and Media Regulation, 28 February 2012. 46 Robert C Denicola, ‘Copyright and Free Speech: Constitutional Limitations on the Protection of Expression’ (1979) 67(2) California Law Review 283, 286; Alexandra Couto, ‘Copyright and Freedom of Expression: A Philosophical Map’ in Axel Gosseries, Alain Marciano and Alain Strowel (eds) Intellectual Property and Theories of Justice (Palgrave Macmillan, 2008) 1, 3; Jacob Weinrib, ‘What is the Purpose of Freedom of Expression?’

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fundamental to the operation of a representative and democratic government.47 Secondly, free expression allows individuals to express diverse political opinions, which is crucial for informed decision-making.48 Finally, freedom of expression is vital for human respect, individual autonomy and self-fulfilment.49 It is central to individualism and transforms individuals into active producers of culture rather than passive recipients.50 In the Internet age, individuals’ Facebook profiles are, in essence, their Internet personalities and are thus central to self-expression.51 An underlying reason for the success of social networking is that ‘people like to express themselves, and are curious about other people’. 52 Arguably, individuals should be free to express their personalities on Facebook, including by way of photographs. 53 However, this may infringe upon the privacy rights of individuals forming part of their lives leading to conflicting interests. The ubiquity and ease of using digital and phone cameras has given rise to the amateur photographer by removing most technical and economic barriers to photography.54 Individuals can now photograph without any knowledge of the technology behind the photographic process.55 The increased functionality of cameras has instigated a culture of personal photography characterised by two

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!(2009) 67(1) University of Toronto Faculty of Law Review 165, 167; Patricia Loughlan, ‘Copyright Law, Free Speech and Self-Fulfilment’ (2002) 23(3) Sydney Law Review 427, 428. 47 Denicola, above n 46, 286; Couto, above n 46, 1, 3; Weinrib, above n 46, 167; Loughlan, above n 46, 428. 48 Couto, above n 46, 1, 3; Weinrib, above n 46, 167; Denicola, above n 46, 286. 49 Loughlan, above n 46, 428; Couto, above n 46, 1, 4; Weinrib, above n 46, 167. 50 Balkin, above n 44, 33. 51 Marsoof, above n 44, 114. 52 Ibid 110, quoting John Cassidy, ‘ME Media: How Hanging Out on the Internet Became Big Business’, New Yorker (online), 15 May 2006 <http://www.newyorker.com/archive/2006/05/15/060515fa_fact_cassidy>. 53 In fact, the Facebook Principles state that a person has the freedom to share any information they wish: Facebook Principles (2013) Facebook, cl 1 <http://www.facebook.com/principles.php>. 54 Pierre Bourdieu, ‘Introduction’ in Pierre Bourdieu (ed) Photography: A Middle-Brow Art (Polity Press, 1990) 1, 7. 55 Vilém Flusser, Towards a Philosophy of Photography (Reaktion Books Ltd, 2000) 57-8. This is exemplified by Kodak’s famous slogan ‘You press the button, we do the rest’: Richard Chalfen, Snapshot Versions of Life (Bowling Green State University Popular Press, 1987) 13. Previously, photography was limited to professional photographers who were able to operate a camera and associated technology: Robert E Mensel, ‘“Kodakers Lying in Wait”: Amateur Photography and the Right of Privacy in New York, 1885-1915’ (1991) 43(1) American Quarterly 24, 28.

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types of amateur photographers – those spontaneously photographing for entertainment, to preserve memories;56 and “serious amateurs” who perceive themselves as partaking in the creation of art.57 Photographs serve as memories, enabling individuals to re-experience life events.58 In the digital age, this is complemented by the ability to connect with and share one’s experiences with others on social media to document one’s life.59 Photographers transcribe ideas of the world into images and portray their personalities and individual perspectives through their photographs.60 Photography also facilitates the expression of one’s feelings, assists in self-realisation and identity formation and enables artistic creation.61 Goffman and Butler’s respective theories of performance and presentation of the “self” frame photography as an important tool of expression. According to Goffman, photographs enable self-representation whereby individuals are conscious of the way they present themselves to others.62 In contrast, Butler

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!56 Individuals no longer photograph because they have deemed something worthy of being photographed: Nancy A Van House, ‘Personal Photography, Digital Technologies and the Uses of the Visual’ (2011) 26(2) Visual Studies 125, 127. This is demonstrated by the prevalence of photographs uploaded onto social networking websites and the introduction of various photograph sharing websites and phone applications, such as Instagram and Flickr. Instagram, for example, better facilitates artistic expression by enabling a person to transform images using a set of filters and then share them with others on Instagram and similar websites. 57 Susan Murray, ‘Digital Images, Photo-Sharing and Our Shifting Notions of Everyday Aesthetics’ (2008) 7 Journal of Visual Culture 147, 151. 58 Pierre Bourdieu, ‘The Cult of Unity and Cultivated Differences’ in Pierre Bourdieu (ed) Photography: A Middle-Brow Art (Polity Press, 1990) 13, 14; José Van Dijck, ‘Digital Photography: Communication, Identity, Memory’ (2007) 7(1) Visual Communication 57, 58. 59 Kreimer, above n 18, 341; Bourdieu, above n 58, 13, 14; Van Dijck, above n 58, 58-9. 60 For a discussion on a photographer’s intentions, see generally Flusser, above n 55, 45; Siân E Lindley et al, ‘Collocated Social Practices Surrounding Photos’ (2009) 67(12) International Journal of Human-Computer Studies 995, 997. 61 Bourdieu, above n 58, 13, 14-5; Van Dijck, above n 58, 58-9. Additionally, individuals often express themselves through re-posting other people’s photographs, including material from popular culture, which directly gives rise to a conflict between copyright and freedom of expression. 62 Nancy A Van House, ‘Collocated Photo Sharing, Story-Telling and the Performance of Self’ (2009) 67 International Journal of Human-Computer Studies 1073, 1084. Erving Goffman contextualises the self as a consciously performed character, validating identity through relationships: at 1083; Hugh Miller, ‘The Presentation of Self in Electronic Life: Goffman on the Internet’ (Paper presented at Embodied Knowledge and Virtual Space Conference, Goldsmiths’ College, University of London, June 1995) 1; Jonas Larsen, ‘Families Seen Sightseeing: Performativity of Tourist Photography’ (2005) 8 Space and Culture 416, 418. See generally Erving Goffman, The Presentation of Self in Everyday Life (Anchor Books for Doubleday, 1959).

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argues that, acting without consciousness, individuals present and construct themselves through taking and sharing photographs.63 A related issue is freedom of the press.64 Media freedom raises broader democratic issues than freedom of expression because of the role of the media as the Fourth Estate.65 Traditionally, news reporting has been the province of media organisations. However, the Internet has given rise to the “citizen journalist” who can upload one-off breaking news items when arriving first upon the scene of an event,66 viewable within minutes by an unlimited audience around the world. This raises complex issues concerning the appropriate scope of media freedoms and the extent to which the freedom of expression of the citizen journalist warrants special protection. 67 Citizen journalists are not subject to the same constraints and ethics codes applying to media organisations, 68 whilst still potentially encroaching on individuals’ privacy rights.

V TENSIONS AND OVERLAPS In light of the hypotheticals described above, it is clear that the emergence of the amateur photographer, coupled with modern social media practices, make it increasingly important to develop a legal solution to resolve the tension

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!63 Van House, above n 62, 1084. Judith Butler argues that individuals routinely act without consciousness according to established norms learnt throughout life: at 1084; Larsen, above n 62, 419. See generally Judith Butler, Gender Trouble: Feminism and the Subversion of Identity (Routledge, 1990). 64 Whilst freedom of expression and freedom of the press are often conflated into one, many perceive these to be different concepts, with freedom of expression serving a self-fulfilment function whereas freedom of the press enables people to inform themselves: Finkelstein and Ricketson, above n 45, 34. 65 The Fourth Estate is a term coined by Thomas Macaulay. See generally Finkelstein and Ricketson, above n 45; Julianne Schultz, Reviving the Fourth Estate (Cambridge University Press, 1998). 66 McGoldrick, above n 26, 127; Finkelstein and Ricketson, above n 45, 65, 86. There are endless examples of citizen journalism, including the Rodney King police bashing, natural disasters, terrorist attacks, shootings and the recent reporting of information regarding the Boston Bombers on social media. 67 For example, journalistic activities of media organisations receive exemption from the Australian Privacy Act: Privacy Act 1988 (Cth) s 7B(4). Nothing, however, appears to exclude online journalists and bloggers from these privileges: Finkelstein and Ricketson, above n 45, 139. 68 For example, citizen journalists are unlikely to be concerned with fair and accurate representations, avoiding biases, conveying the truth and notions of a fair trial. Further, citizen journalist reports are viewed out of context, as a story is not attached, and citizen journalists are not accountable to anyone: Finkelstein and Ricketson, above n 45, 7.

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between a subject’s right to privacy and a photographer’s copyright and freedom of expression. It is clear that each of these rights serves an important role – privacy being at the core of human dignity, freedom of expression central to self-identity and democracy and copyright protecting personal property and creation – and that it is therefore important to find a solution which, as far as possible, allows each to serve its role.

A Privacy Versus Copyright Copyright focuses on rewarding the photographer as creator without regard to the competing rights of the individuals photographed. Yet the ability to exercise copyright can be affected by other laws. It is important to ensure these laws do not inappropriately restrict the exercise of the exclusive rights afforded by copyright. The tension between privacy and copyright arises through competing understandings of personality – copyright frames personality as a commodity, whereas privacy perceives personality as being central to individuality. 69 Interestingly, however, copyright interests are seldom mentioned in the context of privacy case law. For example, in McKennitt v Ash,70 which concerned the publication of an autobiography, the discussion focused exclusively on the balancing of privacy and freedom of expression. To address this conflict in the context of photographs, Facebook has developed a photograph removal system. Initially, Facebook suggests that individuals request the poster of the relevant photograph to remove it from Facebook.71 Alternatively, individuals are able to report a photograph to Facebook that they wish to have deleted.72 Facebook will only remove this photograph if required to do so by the privacy laws of the complaining party’s country.73 This system aims to achieve a balance between the right of the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!69 Heymann, above n 33, 841. 70 [2008] QB 73. 71 Image Privacy Rights (2013) Facebook <http://www.facebook.com/help/428478523862899>. 72 Ibid. 73 Ibid. This seeks to recognise the territorial difficulties posed by social networking websites where users live in many different countries. Notably, individuals living in the US are unable to have content removed on the basis of a privacy violation. Facebook will also automatically

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photographer to post the photograph and the right of the subject to have it removed in protection of his or her privacy.

B Privacy Versus Freedom of Expression The relationship between privacy and freedom of expression is a complex one, both rights having private and public elements to them.74 Privacy seeks to protect the personal rights of human dignity and respect, whilst serving the public function of preserving social relationships and cohesion in society.75 Similarly, freedom of expression is inherently cultural and serves as a basic underpinning of democracy, yet on a personal level, is crucial for self-development and growth.76 These rights nevertheless come into direct conflict, as privacy necessitates secrecy whilst freedom of expression inherently involves publicity. 77 As described by the Californian Supreme Court, ‘the right to know and the right to have others not know are, simplistically considered, irreconcilable’. 78 Privacy protects an individual’s personality and identity, whereas freedom of expression promotes its dissemination. Where expression is by way of photograph, it may infringe upon the privacy of the subject of the photograph. Ultimately, these rights conflict as they both require control over information.79 A photographer wishes to control the photograph’s publication and dissemination, whereas the subject may wish to exercise control to prevent its publication.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!remove the photograph of an individual under the age of 18 if it violates that person’s privacy rights. 74 Moira Paterson, ‘Surveillance in Public Places and the Role of the Media: Achieving an Optimal Balance’ (2009) 14(3) Media and Arts Law Review 241, 249. Whilst these rights come into conflict, they also complement one another as they often work together to protect the individual: Blackman, above n 22, 326-7. 75 Paterson, above n 74, 249-50. 76 Ibid 250; Balkin, above n 44, 5. 77 Marsoof, above n 44, 111. 78 Briscoe v Reader’s Digest Association Inc, 4 Cal 3d 529, 541 (Peters J) (Cal, 1971). 79 Sonja R West, ‘The Story of Us: Resolving the Face-Off Between Autobiographical Speech and Information Privacy’ (2010) 67 Washington and Lee Law Review 589, 604.

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VI CONCLUSION Each of these three rights is worthy of protection, however in many situations simultaneous protection for each of them is not possible. The scenarios outlined above arguably call for different solutions. In the case of the first, Sarah’s right should arguably prevail as the damage arising from her breach of privacy is potentially serious, that is, personal humiliation and the possibility of economic harm arising from loss of future employment opportunities. Pete’s copyright and freedom of expression rights are comparatively weaker. The photograph is not integral to the expression of his personality and it is a mere “snap”, rather than an artistic composition. Arguably the public interest in allowing Pete to reap the benefits of his “creative” efforts and to express himself is insufficiently important to justify taking precedence in this situation. This position, however, is arguably reversed with Jane and Rob. There is little to suggest that Rob’s loss of privacy will result in any specific harm, whereas Jane’s photograph is an artistic work integral to her self-expression as an artist. This demonstrates that a nuanced legal solution is required, which produces different outcomes dependent on the relevant facts of a case. The ways in which these conflicts and tensions are currently resolved in Australia, the US and the EU will be explored below.

3 The Current Position in Australia

I INTRODUCTION Australia is somewhat unique in that it lacks any constitutional or national human rights protection. While copyright, and to a lesser extent moral rights, receive strong statutory protection, the protection for both privacy and freedom of expression is generally quite limited.

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II PRIVACY The Victorian Charter protects individuals against arbitrary or unlawful interferences with their privacy.80 However, this is limited to intrusions by public authorities and is not directly enforceable, thus not permitting an individual to directly sue for a breach.81 Privacy in the Australian private sector is protected primarily by the Privacy Act 1988 (Cth) (“Privacy Act”),82 which is an information privacy law. This Act contains a set of Australian Privacy Principles, which govern dealings with personal information.83 A breach constitutes an interference with privacy.84 Whilst the definition of ‘personal information’ extends to photographs,85 the Act does not apply to photographs taken for personal, non-commercial purposes.86 The publication of photographs on Facebook may also fall within the ambit of the Surveillance Devices Act 1999 (Vic) (“SDA”), which prohibits individuals from using an optical surveillance device to visually record, 87 and subsequently publish,88 without consent a private activity to which they are

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!80 Charter of Human Rights and Responsibilities Act 2006 (Vic) s 13. 81 Ibid s 6(2). 82 Privacy Act 1988 (Cth). See also Information Privacy Act 2000 (Vic) and the Health Records Act 2001 (Vic). 83 Privacy Act 1988 (Cth) sch 1 as amended by the Privacy Amendment (Enhancing Privacy Protection) Act 2012 (Cth). Prior to 14 March 2014, the Privacy Act 1988 (Cth) contained a set of National Privacy Principles in schedule 3 and a set of Information Privacy Principles in section 14. These two sets of principles were replaced with a single set of Australian Privacy Principles (“APPs”), which apply to both government agencies and organisations. The APPs retain the exclusion for personal, family or household affairs in section 16 of Schedule 1, thus not altering the effect of this amendment for the purposes of this paper. 84 Privacy Act 1988 (Cth) ss 13(a), 13A(1). 85 The Privacy Act broadly defines ‘personal information’ as information, whether recorded in a material form or not, about an individual whose identity is apparent or can reasonably be ascertained, from the information: ibid s 6 (definition of ‘personal information’). Thus, this would include photographs in which the relevant person is identifiable. 86 The Privacy Act applies to ‘organisations’, which includes individuals, but it does not extend to information held by an individual for personal, family or household affairs: ibid ss 6C, 16E. Therefore, the provisions are generally limited in their application to public sector agencies and businesses with a gross annual turnover of more than $3 million: ibid ss 6C, 6D. 87 ‘Optical surveillance device’ is defined as any device capable of being used to record visually or observe an activity: Surveillance Devices Act 1999 (Vic) s 3(1) (definition of ‘optical surveillance device’). This would include a camera phone or digital camera. 88 Ibid s 11(1). See the exceptions in section 11(2) of the SDA. Whilst there is no definition of the word ‘publish’, presumably this would include posting the photograph on Facebook.

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not a party, unless one of the exceptions apply.89 These provisions may render the taking and uploading of photographs an offence in certain circumstances. In order to be protected under the SDA, an activity must be considered “private”, that is, carried on in circumstances which reasonably indicate that those involved wish the activity to be unobserved by others.90 The photograph of Sarah taken at the party would not be prohibited, whereas she would be able to gain protection if photographed whilst engaging in sexual activity in a private room nearby. A significant limitation is that the SDA excludes activities occurring outside a building.91 Additionally, the SDA permits photographing a personal activity without consent from others if the photographer is a participant,92 which removes protection for others depicted. However, a person is only able to publish this photograph with the express or implied consent of those participating.93 This highlights a key issue of this paper; that individuals’ lives are inherently intertwined.94 Individuals who post photographs of their own lives inevitably depict others who have shared their experiences. This identifies immense problems in determining the appropriate boundaries of privacy protection, posing the question of whose consent to dissemination should be required.95 The SDA’s limitation of protection to activities occurring in private draws upon the traditional binary conception typically surrounding notions of privacy, with activities being perceived as either private or public, with no grey areas. 96 Activities occurring in public are automatically denied

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!89 Ibid s 7(1). See the exceptions in section 7(2) of the SDA. 90 Ibid s 3(1). 91 Ibid. The Victorian Law Reform Commission (“VLRC”) has recommended the deletion of the words ‘an activity carried on outside a building’ so as to include private activities that take place in public: Victorian Law Reform Commission, above n 9, 16. This will be discussed in more detail below. 92 Surveillance Devices Act 1999 (Vic) s 7(1). 93 Ibid s 11. 94 Solove, above n 14, 134. 95 Lior Jacob Strahilevitz, ‘Collective Privacy’ in Saul Levmore and Martha C Nussbaum (eds) The Offensive Internet: Speech, Privacy and Reputation (Harvard University Press, 2010) 217, 220. Strahilevitz suggests that the preferences of the majority should prevail in situations of voluntary associations, whilst involuntary associations might rather require the consent of each person: at 231. 96 Solove, above n 14, 7.

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protection. 97 Prior to the Internet age, this was not a problem since individuals maintain relative anonymity in public.98 However, the online world renders them identifiable and often identified, demanding the recognition of privacy in public.99 This is supported by the Victorian Charter as the privacy right contained within it is not limited to activities occurring in private.100 The way that other jurisdictions have dealt with this issue will be discussed below. The public-private distinction is important as individuals generally behave differently in private than in public. In public, individuals are more cognisant of the impression they may make, yet in private are able to relax.101 Contextual integrity is also central to the private-public dichotomy.102 Privacy enables individuals to display varying versions of their personalities suited to the situation and audience. 103 Yet a photograph isolates a moment from its temporal, spatial and situational context and places it into a new one.104 Certain activities are appropriate in some situations and inappropriate or humiliating in others. A photograph viewed out of context has the potential to be highly damaging, exacerbated by the Internet’s unforgiving nature. Finally, protecting privacy in public is important given that public acts viewed momentarily by those in the vicinity do not compare to a permanent record, which is viewable by a greater audience online for lengthy periods.105 Privacy receives limited protection at common law under the action for breach of confidence.106 Protection may also occasionally be available through other causes of action, including defamation, trespass or nuisance.107

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!97 Ibid; William L Prosser, ‘Privacy’ (1960) 48(3) California Law Review 383, 391. 98 Solove, above n 14, 165. 99 Miles, above n 14, 13. The VLRC has identified the need for amendment to the SDA in accordance with this view and identified various factors to determine whether an individual would have a reasonable expectation of privacy in public, such as the location and the nature of the activity: Victorian Law Reform Commission, above n 9, 85-6. 100 Victorian Law Reform Commission, above n 9, 85. 101 Solove, above n 14, 68; Standing Committee of Attorneys-General, above n 28, 9. 102 Miles, above n 14, 17. 103 Ibid 9. See generally Blackman, above n 22, 325. 104 Miles, above n 14, 18. 105 Ibid 13. 106 An action for breach of confidence may protect private information if it has the requisite quality of confidentiality. For example, the plaintiff in Giller v Procopets (No 2) was awarded compensation for the distribution of a video depicting her engaged in sexual activity as her

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The common law does not formally recognise a specific cause of action for privacy invasions. In Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (“Lenah”), the High Court held that there was no obstacle to the creation of such a cause of action.108 The court discussed two possible approaches – a privacy tort, as recognised in New Zealand, 109 and an extension of the traditional action for breach of confidence, as has occurred in the United Kingdom (“UK”).110 The High Court failed to give clear support to either option, but appeared to favour the latter.111 To date, two lower courts have awarded remedies partly on the basis of a breach of privacy,112 but no

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!relationship with the defendant created an obligation of confidentiality: (2009) 24 VR 1. This action is frequently relied upon to protect privacy in the United Kingdom, as is discussed below. 107 Sara Haenggi, ‘The Right to Privacy is Coming to the United Kingdom: Balancing the Individual’s Right to Privacy from the Press and the Media’s Right to Freedom of Expression’ (1999) 21(3) Houston Journal of International Law 531, 541; Standing Committee of Attorneys-General, above n 28, 15. See generally Mark Johnston, ‘Should Australia Force the Square Peg of Privacy Into the Round Hole of Confidence or Look to a New Tort’ (2008) 5(1/2) Privacy Law Bulletin 2, 4-5 for a discussion of these causes of action. These causes of action are unlikely to provide protection in relation to the issue discussed in this paper. Additionally, the continual posting of embarrassing photographs of another person may constitute an offence under section 474.17 of the Criminal Code Act 1995 (Cth), which applies where a person uses a carriage service (defined in the Telecommunications Act 1997 (Cth)) in a way that reasonable persons would regard as being menacing, harassing or offensive. Given this is a criminal offence, it is only likely to apply in the most extreme of cases. 108 (2001) 208 CLR 199, [107] (Gummow and Hayne JJ), [316] (Callinan J). The High Court overruled Victoria Park Racing & Recreation Grounds Co Ltd v Taylor (1937) 58 CLR 479 which, for many years, was assumed to have precluded the development of a common law cause of action. The court recognised that individuals do have a right to privacy but simultaneously highlighted the difficulty defining the boundaries of the right. For example, Gleeson CJ stated that ‘there is no bright line which can be drawn between what is private and what is not’: at [42] (Gleeson CJ). 109 See Hosking v Runting [2005] 1 NZLR 1. This is based on the US public disclosure tort discussed below. 110 This is discussed below. See, eg, Douglas v Hello! Ltd (No 2) [2006] QB 125. For a discussion of the implications of adopting either of these approaches, see generally David Lindsay, ‘Protection of Privacy Under the General Law Following ABC v Lenah Game Meats Pty Ltd: Where to Now?’ (2002) 9(6) Privacy Law and Policy Reporter 101. Ashley JA in Giller v Procopets (No 2) also discussed these two main approaches: (2009) 24 VR 1, [129], [167]–[168] (Ashley JA). 111 Gleeson CJ stated that ‘the lack of precision of the concept of privacy is a reason for caution in declaring a new tort’, thus implying that a breach of confidence approach may be more appropriate: Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, [41] (Gleeson CJ). 112 Grosse v Purvis (2003) Australian Torts Reports 81-706; Doe v Australian Broadcasting Corporation [2007] VCC 281 (3 April 2007). Senior Judge Skoien in Grosse v Purvis acknowledged that whilst a bold step, it is both logical and desirable to recognise the common law right, yet failed to identify the limits of the action: (2003) Australian Torts Reports 81-706, [442] (Skoein SJ). Similarly, Justice Hampel in Doe v Australian Broadcasting Corporation argued that the invasion of privacy is an actionable wrong, yet omitted to formulate an exhaustive definition of privacy: [2007] VCC 281 (3 April 2007), [157] (Hampel J).

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appellate court has affirmed the existence of a privacy-based action.113 In the meantime, three Australian law reform commissions have recommended the enactment of statutory causes of action to protect privacy,114 two of which have proposed elements of a reasonable expectation of privacy and of being highly offensive to a person of ordinary sensibilities.115 These recommendations have not yet been acted upon.116 Further, the Australian Law Reform Commission (“ALRC”) is currently conducting an inquiry into protecting serious privacy invasions in the digital era, with consideration of competing interests, including freedom of expression.117

III COPYRIGHT Whilst copyright is not protected as a human right under the Victorian Charter,118 it does receive considerable legislative protection in Australia.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!113 Victorian Law Reform Commission, above n 9, 128. Rather, subsequent judicial commentary has expressly stated it has not yet been recognised in Australia: Giller v Procopets [2004] VSC 113 (7 April 2004), [188] (Gillard J); Giller v Procopets (No 2) (2009) 24 VR 1, [129], [167]–[168] (Ashley JA); Kalaba v Commonwealth [2004] FCA 763, [6] (Heerey J). 114 Australian Law Reform Commission, above n 17, recommendation 74-1; Victorian Law Reform Commission, above n 9, recommendation 22; New South Wales Law Reform Commission, Invasion of Privacy, Report 120 (April 2009) 5. 115 The VLRC and ALRC recommended these elements as part of their proposed statutory tort of privacy: Victorian Law Reform Commission, above n 9, 152; Australian Law Reform Commission, above n 17, 2567-8. The NSW Law Reform Commission did not support the requirement for an invasion to be highly offensive to a person of ordinary sensibilities: See New South Wales Law Reform Commission, above n 114, 33. 116 The Gillard government published an issues paper in response: See Department of Prime Minister and Cabinet, A Commonwealth Statutory Cause of Action for Serious Invasion of Privacy, Issues Paper (September 2013). However, it took no further action to enact a privacy-based cause of action and the issue did not feature in recent proposals for reform of media laws. Former Communications Minister Stephen Conroy suggested that the government would not be introducing a privacy tort in the near future, but rather would refer the question of a statutory cause of action back to the ALRC: Bruce Baer Arnold, ‘Reform That Wobbles like Jelly: A Spineless Approach to Privacy Protection’, The Conversation (online), 14 March 2013 <http://theconversation.com/reform-that-wobbles-like-jelly-a-spineless-approach-to-privacy-protection-12787>; George Williams, ‘Privacy: The Fix Should Not Be Left to Judges’, The Sydney Morning Herald (online), 26 March 2013 <http://www.smh.com.au/federal-politics/political-opinion/privacy-the-fix-should-not-be-left-to-judges-20130325-2gq4l.html>. 117 Attorney-General’s Office, ‘Protecting Privacy in the Digital Era’ (Media Release, 12 June 2013); Australian Law Reform Commission, Serious Invasions of Privacy in the Digital Era, Terms of Reference (12 June 2013) <http://www.attorneygeneral.gov.au/Mediareleases/Pages/2013/Second%20quarter/12June2013-Protectingprivacyinthedigitalera.aspx>. The Final Report will be presented to the Attorney-General by June 2014. 118 As mentioned previously, the Victorian Charter only protects a person’s property, whereas international conventions protect ‘the moral and material interests resulting from any... artistic production of… the author’: Charter of Human Rights and Responsibilities Act 2006 (Vic) s 20; Universal Declaration of Human Rights, GA Res 217A (III), UN GAOR, 3rd sess,

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The Copyright Act 1968 (Cth) grants authors, including photographers, copyright in their work entitling them to exercise certain exclusive rights, including the right to publish and communicate their work to the public.119 Copyright is automatically granted to an author, without requiring registration, provided the work is original,120 connected to Australia and recorded in a material form.121 Copyright normally vests in the photographer, but if the photograph has been commissioned for a private or domestic purpose, the photograph will be owned by the person who has commissioned it.122 As photographs can now easily be captured by anyone, issues arise concerning the originality requirement.123 Some argue that only photographs with some level of originality, labour, skill and judgment should be protected. 124

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!183rd plen mtg, UN Doc A/810 (10 December 1948) art 27(2); International Covenant on Economic, Social and Cultural Rights, opened for signature 16 December 1966, 999 UNTS 3 (entered into force 3 January 1976) art 15(1)(c). 119 Copyright Act 1968 (Cth) ss 31(1), 35. A photograph is able to be subject to copyright: at s 10(1) (definition of ‘artistic work’). To communicate the work includes making the work available online or electronically transmitting the work: Copyright Amendment (Digital Agenda) Act 2000 (Cth) sch 1 s 6. This would include posting a photograph to Facebook. 120 Davison, Monotti and Wiseman, above n 32, 8, 221. A photograph is considered to be original as long as it originated with the photographer and was not copied from another source: at 8, 221. 121 Ibid 8, 185. A work is recorded in a ‘material form’ when it is reduced to any form (whether visible or not) of storage, or a substantial part of it can be reproduced: Copyright Act 1968 (Cth) s 10(1). It is likely, though has not been categorically ruled upon, that a digital photograph satisfies this requirement, given that material form includes non-tangible forms of storage: CCH International, Australian Intellectual Property Commentary (15 April 2013) ¶2-000. In the context of literary works, the Federal Court has held that the creation of a digital copy would constitute a material form: Pacific Gaming Pty Ltd v Aristocrat Leisure Industries Pty Ltd [2001] FCA 1636, [108] (Sackville, Finn and Kenny JJ). 122 Copyright Act 1968 (Cth) s 35(5). The subject may, however, be subject to restrictions concerning his or her use of the photograph. 123 This issue remains unsettled in Australia, despite case law dealing with originality in relation to other types of work: See generally IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458; Telstra Corporation Ltd v Phone Directories Co [2010] FCAFC 149. Interestingly, even if copyright in a photograph is granted, it does not prevent a person copying the idea and taking the same photograph, as copyright only protects the expression of the idea. 124 Justin Hughes, ‘The Photographer’s Copyright – Photograph as Art, Photograph as Database’ (2012) 25(2) Harvard Journal of Law and Technology 339, 373-4; Fairfax Media Publications Pty Ltd v Reed International Books Australia Pty Ltd (2010) 189 FCR 109, [30] (Bennett J). This would be a question of fact, whereby the contribution must be more than negligible: CCH International, Australian Business Advisers Guide (15 April 2013), ¶63-220. This approach is consistent with the historical rejection of photographs as material able to be subject to copyright, as it was believed that photographers merely operated machines, recording reality rather than engaging in artistic endeavour: Hughes, above n 124, 341-51. See

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However, originality does not require inventive thought or artistic and creative merit.125 Alternatively, it may be argued that originality is, in any case, satisfied by the mere fact that it is taken, through the photographer’s creative choices such as lighting, positioning and camera settings. 126 No two photographs, however simple, are identical as they are inherently affected by the individual photographer. 127 This consideration is relevant to the formulation of a solution which achieves an appropriate balance between the competing rights.

IV FREEDOM OF EXPRESSION Despite being central to a free democratic society, Australia offers limited protection to freedom of expression, in contrast to the US which avidly protects a broader range of free speech in the US Constitution. 128 The Australian right is not a positive personal right and so does not create rights as between two individuals.129 The Victorian Charter protects the freedom to seek, receive and impart information and ideas of all kinds.130 As with privacy, this right does not grant any enforceable rights, although it requires Victorian courts to take freedom of expression into account in interpreting legislation. This right is not absolute

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!generally Fairfax Media Publications Pty Ltd v Reed International Books Australia Pty Ltd (2010) 189 FCR 109; Bridgeman Art Library Ltd v Corel Corporation, 36 F Supp 2d 191 (SD NY, 1999). 125 University of London Press Ltd v University Tutorial Press Ltd [1916] 2 Ch 601, 608 (Peterson J); IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458, [33] (French CJ, Crennan and Kiefel JJ). Likewise, Keane CJ in Telstra Corporation Ltd v Phone Directories Co suggested that any level of intellectual effort will suffice and thus the decision to take a photograph would meet the originality requirement: [2010] FCAFC 149, [58] (Keane CJ). 126 Hughes, above n 124, 365; CCH International, Australian Business Advisers Guide (15 April 2013), ¶63-220. 127 Jewelers’ Circular Publishing Co v Keystone Publishing Co, 274 F 932, 934 (Hand J) (SD NY, 1921). Unless a photograph is more than a mere “snap”, copyright protection will only offer minimal protection, given it only protects the expression of the idea and not the idea itself. 128 United States Constitution amend I. Eric Barendt sets out various types of speech which fall within the protection of the US First Amendment: Eric Barendt, ‘Free Speech in Australia: A Comparative Perspective’ (1994) 16 Sydney Law Review 149, 152. 129 Lange v Australian Broadcasting Corporation (1997) 189 CLR 520, 560 (Brennan CJ, Dawson, Toohey, Gaudron, McHugh, Gummow and Kirby JJ). 130 Charter of Human Rights and Responsibilities Act 2006 (Vic) s 15(2). Photography would fall within the scope of this provision, either as art or, if not considered art in the traditional sense, as any other medium: ss 15(2)(d)-(e).

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and may be subject to restrictions, including those necessary for ‘respect of the rights or reputations of others’,131 which would likely include privacy. One aspect of freedom of expression, freedom of political communication, receives implied constitutional protection.132 The High Court has unanimously established that whilst broad, this right is not a general right to free speech.133 It extends to non-verbal communications,134 such as photographs, but only where the communication relates to a political issue.135 Furthermore, it is not an overarching freedom to communicate and does not create rights as between individuals. 136 Rather, it prevents illegitimate interferences with expression and grants freedom from laws inhibiting certain types of communication.137 The freedom of political communication would need to be considered in formulating an appropriate solution in Australia. Apart from this, freedom of expression receives only indirect protection through defences or exceptions to various laws which potentially impinge on it, such as defamation, sedition, offensive language and intellectual property.138

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!131 In particular, the Victorian Charter specifies that restrictions may be imposed by law or as is necessary ‘for respect of the rights or reputations of others’ and for the protection of national security, public order or public health and morality: ibid s 15(3). 132 See, eg, Australian Capital Television v Commonwealth (No 2) (1992) 177 CLR 106; Lange v Australian Broadcasting Corporation (1997) 189 CLR 520; Nationwide News v Wills (1992) 177 CLR 1; Coleman v Power (2004) 220 CLR 1. 133 Lange v Australian Broadcasting Corporation (1997) 189 CLR 520, 561, 571 (Brennan CJ, Dawson, Toohey, Gaudron, McHugh, Gummow and Kirby JJ). Many argue that freedom of expression should also enable individuals to participate and share ideas, which is central to human individuality: Balkin, above n 44, 3-4. 134 Levy v Victoria (1997) 189 CLR 579, 595 (Brennan CJ), 613 (Toohey and Gummow JJ), 622 (McHugh J), 641 (Kirby J). 135 In contrast, documents such as the US Constitution, the Universal Declaration of Human Rights and the German Basic Law protect freedom of speech in relation to artistic, moral, literature and commercial speech and expression, which would include non-political photographs: Barendt, above n 128, 158, 161; Robert M O’Neil, ‘Freedom of Expression and Public Affairs in Australia and the United States: Does a Written Bill of Rights Really Matter?’ (1994) 22(1) Federal Law Review 1, 9. 136 Couto, above n 46, 1, 3; Levy v Victoria (1997) 189 CLR 579, 594 (Brennan CJ), 622 (McHugh J), 645 (Kirby J). 137 Couto, above n 46, 1, 3; Levy v Victoria (1997) 189 CLR 579, 594 (Brennan CJ), 622 (McHugh J), 645 (Kirby J). 138 Justice Michael Kirby, ‘Freedom of Expression – Some Recent Australia Developments’ (1993) 19(4) Commonwealth Law Bulletin 1778, 1778.

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V RESOLVING THE TENSIONS

A Privacy Versus Copyright Where a tension arises between a photographer’s copyright in a photograph and a subject’s right to privacy, copyright will take precedence by default as privacy is not generally protected in this situation whereas copyright receives legislative protection. However, the exercise of copyright does not absolve a copyright owner from liability or obligations under other laws regulating the dissemination of information and so may be limited to the extent that privacy does apply. This has been illustrated in the context of access to medical records. Patients are now legally entitled to access their records due to the extension of the Privacy Act to the private sector.139 These rights have effectively negated the impact of the decision in Breen v Williams, which held that access to medical records was not permitted where a doctor owned the copyright in them.140

B Privacy Versus Freedom of Expression The potential for conflict between privacy and freedom of expression was discussed in Lenah, but the High Court found it unnecessary to engage in a balancing exercise given it did not recognise a privacy right on the plaintiff’s part.141 Currently, in a dispute, freedom of expression would take precedence by default, as privacy is generally not protected. However, freedom of expression cannot operate as a cause of action, but only a defence.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!139 Privacy Act 1988 (Cth) sch 1 pt 5, as amended by Privacy Amendment (Enhancing Privacy Protection) Act 2012 (Cth). Victorian patients also have similar rights under the Health Records Act 2001 (Vic) sch 1 s 6 and Information Privacy Act 2000 (Vic) sch 1 s 6. Prior to the amendment by the Privacy Amendment (Enhancing Privacy Protection) Act 2012 (Cth), see Privacy Act 1988 (Cth) s 14 principle 6, sch 3 s 6. 140 (1996) 186 CLR 71. 141 Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, [84], [126], [129]–[132] (Gummow and Hayne JJ), [190]–[191] (Kirby J); Lindsay, above n 110. Kirby J came the closest to engaging in a balancing act, recognising that the constitutional protection afforded to the freedom of political communication placed the balance in favour of the freedom of expression and he refused to grant the injunction. Subsequent cases, such as Doe v Australian Broadcasting Corporation [2007] VCC 281 (3 April 2007), have not dealt with this issue in detail and thus the law remains in a state of uncertainty.

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4 The Position in the US and EU

I INTRODUCTION The Australian approach adopted above is not universal and other jurisdictions have taken different stances. The US and EU provide useful comparative insight because their courts have dealt with these issues more frequently. Differences emerge due to the different approaches to privacy taken by these jurisdictions. EU privacy laws aim to protect individuals’ dignity and public image, whereas US privacy law is focused on personal liberty and protection against government intrusion.142

II THE US

A Privacy The US does not provide explicit constitutional protection for privacy.143 Privacy receives some common law protection and statutory protection, but has no general private sector law equivalent to the Australian Privacy Act.144 US common law recognises four distinct privacy torts,145 of which two are directly relevant to photographs on Facebook. First, the tort of public disclosure of private facts requires a plaintiff to establish a reasonable expectation of privacy and prove that disclosure would be highly offensive to a reasonable person.146 This tort gives rise to a direct conflict between privacy and freedom of expression, as disclosing true facts,

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!142 Robert Kirk Walker, ‘The Right to be Forgotten’ (2012) 64(1) Hastings Law Journal 101, 114. These preoccupations are not determinative, but rather identify the tendency to lean towards either dignity or liberty: at 114-5. 143 Rather, it may receive indirect protection: See, eg, United States Constitution amends IV, V, XIV s 1. 144 For a full discussion of the development of the law of privacy in the US, as well as the current law, see Tracie B Loring, ‘An Analysis of the Informational Privacy Protection Afforded by the European Union and the United States’ (2002) 37(2) Texas International Law Journal 421. A reluctance to provide for a general private sector law is attributable to US fears of an encroaching government: at 422. 145 American Law Institute, Restatement (Second) of Torts (1977) § 652. 146 Ibid § 652D.

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even if private, involves the exercise of free speech.147 As this conflicts with a constitutional right, an action based on this tort has never been upheld by the Supreme Court. 148 Courts have not developed a consistent approach in determining whether this tort applies to photographs taken in public, partly due to the rigidity of the tort.149 The second relevant tort is the misappropriation of likeness tort, which protects the proprietary interests of individuals to make exclusive use and to control the commercial value of their identity, name or likeness.150 The tort varies in its breadth; some jurisdictions simply require the likeness to be used for the defendant’s ‘own use or benefit’,151 whereas others require use for advertising or trade purposes.152 This tort also creates conflicts with freedom of speech, insofar as it extends to commercial speech.153

The coverage of the four torts means that generally a person will not gain protection for photographs taken in public, but this is not absolute.154

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!147 Stephen R Barnett, ‘“The Right to One’s Own Image”: Publicity and Privacy Rights in the United States and Spain’ (1999) 47(4) American Journal of Comparative Law 555, 557. Therefore, it is likely that the validity of this tort is limited to cases where the information is unlawfully obtained and is not in the public interest: Walker, above n 142, 111. Further, an exception operates where information is newsworthy, even if of minimal social value: Blackman, above n 22, 314. 148 Walker, above n 142, 109; Barnett, above n 147, 557. 149 Blackman, above n 22, 356-63. In particular, the torts fail to differentiate between photographs taken in a busy location as compared to a secluded area, demonstrating the rigidity of the approach adopted: See generally Blackman, above n 22, 356-63. 150 American Law Institute, Restatement (Second) of Torts (1977) § 652C; Amy Morganstern, ‘In The Spotlight: Social Network Advertising and The Right Of Publicity’ (2008) 12(2) Intellectual Property Law Bulletin 181, 185; Walker, above n 142, 108; Barnett, above n 147, 559-60; Goldstein, above n 25, 245. 151 ‘In the Face of Danger: Facial Recognition and the Limits of Privacy Law’ (2007) 120(7) Harvard Law Review 1870, 1878; Goldstein, above n 25, 245. 152 ‘In the Face of Danger’, above n 151, 1878; Goldstein, above n 25, 245; See, eg, NY Civil Rights Law (LexisNexis 2013) § 50. 153 The Supreme Court has granted some level of protection to commercial speech: Barnett, above n 147, 563. 154 For example, in McNamara v Freedom Newspapers Inc, the court held that a photograph depicting the genitals of a student was not in breach of the tort as the student was partaking in a public game of sport: 802 SW 2d 901, 905 (Benavides J) (13th D Tex, 1991). In contrast, in Daily Times Democrat v Graham, the court held that the publication on the front page of a newspaper of a photograph of a woman’s dress blown up was in breach, even though photographed in public, given the obscenity and indecency of it: 276 Ala 380, 382 (Harwood J) (Ala, 1964).

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B Copyright

Copyright in the US is protected by the Copyright Act of 1976.155 This Act grants copyright to the author of a work in relation to ‘pictorial, graphic and sculptural works’, which includes photographs.156 The Act also contains a broad fair use exception to copyright. 157 Copyright does not receive constitutional protection.

C Freedom of Expression Significantly, the First Amendment to the US Constitution states that Congress shall make no law ‘abridging the freedom of speech, or of the press’.158 Whilst non-political speech is protected by the First Amendment,159 it has not been conclusively determined whether purely artistic expression, such as expression by way of photograph, is protected.160 Unlike Australia, this right is not limited to legislative action, but may also be relied upon when coming into conflict with the rights of others.161 It also provides the basis for reading down or invalidating statutes. 162 However, as in Australia, it is unlikely that a person can bring an action against another individual solely on the grounds of freedom of expression, but is more likely to operate as a defence.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!155 Copyright Act of 1976, 17 USC. 156 Ibid §§ 101 (definition of ‘Pictorial, graphic, and sculptural works’), 102(a)(5), 201(a). 157 Ibid § 107. Whilst far broader than the Australian equivalent, it does not extend to a general freedom of expression. In order to determine whether the use is fair, the section sets out various factors to be taken into account. 158 United States Constitution amend I. 159 Balkin, above n 44, 38. 160 The court in Hoepker v Kruger acknowledged that the right will protect freedom of artistic expression: 200 F Supp 2d 340, 350 (Hellerstein J) (SD NY, 2002). Some critics suggest that artistic expression, if it lacks political expression, ought not to be granted the same level of protection as political speech: Robert M O’Neil, ‘Artistic Freedom and Academic Freedom’ (1990) 53(3) Law and Contemporary Problems 177, 178. Whilst photographs can claim protection under the First Amendment, opponents argue they should not receive protection given that they merely record events rather than portray an idea: Kreimer, above n 18, 367-373. 161 Hoepker v Kruger, 200 F Supp 2d 340, 450 (Hellerstein J) (SD NY, 2002). 162 Ibid 348 (Hellerstein J).

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D Resolving the Tensions In summary, the US provides legislative protection for copyright, as in Australia, but provides much stronger protection for freedom of expression. Despite the existence of privacy torts, privacy protection is generally weaker. In a dispute, it is likely that the rights of the photographer will prevail.

1 Privacy Versus Copyright The emphasis that the US places upon property rights and commercial interests, coupled with strong statutory protection afforded to copyright in contrast to limited privacy protection, suggests that copyright will generally prevail by default. The relationship between these rights has been discussed in the context of a person using copyright interests to restrain the publication of personal writings by others on privacy grounds.163 This brings privacy into conflict with the fair use exceptions, where the tendency is to protect free speech. An important limitation on using copyright to protect privacy is that it only protects the expression, as opposed to the factual content of a communication. The tendency to protect freedom of expression is not, however, absolute. It is implicitly accepted that a copyright owner’s right to publish material may give way to the extent that a plaintiff can establish a privacy breach, for example, a breach of the misappropriation tort.164 Further, privacy rights tend to prevail over copyright interests where the information is highly personal, where disclosure would serve little public interest, but rather mere voyeurism, or where the individual concerned has a strong personal interest in preventing the publication.165

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!163 New Era Publications International, ApS v Henry Holt & Co Inc, 695 F Supp 1493, 1505 (Leval J) (SD NY, 1988). This case concerned the publication of a biography of Ron Hubbard, containing his published and unpublished writings. 164 See generally Lawrence v A.S. Abell Co, 299 Md 697 (Md, 1984). This involved an unsuccessful attempt to prevent a newspaper from using photographs of two children in its advertising. 165 New Era Publications International, ApS v Henry Holt & Co Inc, 695 F Supp 1493, 1505 (Leval J) (SD NY, 1988).

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2 Privacy Versus Freedom of Expression In a dispute between privacy and freedom of expression, it is likely that the photographer’s freedom of expression rights will be prioritised over the subject’s privacy rights. US courts have consistently held that ‘the balance is always weighed in favour of free expression’.166 The court in Hoepker v Kruger held that the First Amendment is granted full protection and operates as a strong defence, even when in conflict with another individual’s right to privacy.167 It is argued that privacy rights are too newly established and difficult to define to warrant interference with the long-established First Amendment.168 Yet this approach is not irrefutable, as courts retain discretion as to the balance to be adopted. Courts have frequently prioritised privacy rights where it would facilitate rehabilitation.169 Blackman has suggested a tort based on the right to one’s digital identity, which may resolve this tension in the digital context.170 In summary, this tort is violated when a person photographs another and widely disseminates this photograph without consent. The subject must have had a reasonable expectation of privacy and it must be offensive to a reasonable person.171 The photograph must not be newsworthy.172

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!166 Liberty Lobby Inc v Pearson, 390 F 2d 489, 491 (Burger J) (DC Cir, 1968); Walker, above n 142, 110. In particular, this is often referred to as a ‘trump card’: Johnston, above n 107, 14. 167 200 F Supp 2d 340, 348, 450 (Hellerstein J) (SD NY, 2002). 168 West, above n 79, 607-8. 169 In Melvin v Reid, the court permitted suit against a film detailing the story of a prostitute who had been wrongly accused of murder: 112 Cal App 285 (4th D Cal, 1931). Similarly, Briscoe v Reader’s Digest Association Inc involved a magazine article detailing a crime committed by the plaintiff 11 years prior. The importance of protecting the First Amendment did not result in a total abrogation of privacy rights, as the plaintiff had been rehabilitated and the article was of little social value: 4 Cal 3d 529, 541-2 (Peters J) (Cal, 1971). 170 Blackman, above n 22, 354-88. 171 Ibid 354-5. 172 Ibid 354-5. In more detail, this tort is violated when ‘an individual or organization records and reproduces an image of another without consent using a visual or auditory enhancing device while (1) the party recorded possessed a reasonable expectation of privacy to not be recorded; (2) the matter recorded would be offensive to a reasonable person; (3) the recording is intentionally widely transferred or disseminated through any electronic medium to any electronic format; and (4) the recording is not newsworthy, where a newsworthy recording (4a) has social value, (4b) minimally intrudes into ostensibly private affairs, and (4c) the party that is recorded voluntarily acceded to the position of public notoriety’: Blackman, above n 22, 354-88.

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E Californian Right to Seek Removal California has recently taken measures to address the tensions that arise. The Californian Senate has approved a Bill enabling minors to request certain operators to erase online content.173 As this right brings privacy and freedom of expression into conflict, it only enables an individual to remove content he or she personally has posted.174 This right resembles the EU right to be forgotten, discussed below, but is more limited and leaves the tension between privacy and freedom of expression unresolved.

II THE EU This section will be considered from the perspective of the EU and that of the UK, as a Member State. The European Convention on Human Rights (“Convention”) grants individuals certain rights, including rights to privacy, freedom of expression and the peaceful enjoyment of property, which Member States are required to uphold.175 The Human Rights Act 1998 (UK) confirms these rights into UK law, requiring courts to interpret legislation in accordance with these rights and requiring public authorities to obey them.176 However, this Act only applies to public individuals and authorities, thus not operating between private individuals.177

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!173 Privacy Rights for California Minors in the Digital World, S 568, (2013) <http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140SB568>. These operators include Internet website operators, online service or application operators or mobile service or application operators. This law is criticised as it fails to recognise the impossibility of deleting information from the Internet: See generally Gregory Ferenstein, ‘On California’s Bizarre Internet Eraser Law For Teenagers’, CrunchGov (online), 24 September 2013 <http://techcrunch.com/2013/09/24/on-californias-bizarre-internet-eraser-law-for-teenagers/>. 174 Privacy Rights for California Minors in the Digital World, S 568, (2013), s 22581(b)(2) <http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140SB568>. It is argued that in order to effectively operate, the law needs to extend to content which has been reposted or archived: Ferenstein, above n 173. 175 Convention for the Protection of Human Rights and Fundamental Freedoms, opened for signature 4 November 1950, 213 UNTS 221 (entered into force 3 September 1953); Andrew Drzemczewski, ‘The Sui Generis Nature of the European Convention on Human Rights’ (1980) 29(1) International and Comparative Law Quarterly 54, 54-5. 176 Human Rights Act 1998 (UK) c 42, ss 3(1), 6(1). 177 Campbell v Mirror Group Newspapers Ltd [2004] 2 AC 457, [18] (Lord Nicholls), [49] (Lord Hoffmann). It has been argued, however, that the Convention may be interpreted so as

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The EU Data Protection Directive (“Directive”) is also relevant as it governs the use, processing and collection of personal data, granting individuals a right to protection of their personal data.178 This has been implemented in the UK by the Data Protection Act 1998 (UK) (“DPA”). 179 The Directive is currently undergoing reforms and will be repealed and replaced by a proposed Data Protection Regulation (“Regulation”).180

A Privacy

The Directive expressly declares that Member States must protect individuals’ privacy rights in relation to the processing of personal data.181 ‘Personal data’ extends to photographs of identifiable or identified individuals.182 This would

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!to protect the infringement of rights by non-governmental bodies, such as the media, which may extend to infringements by the citizen journalist: Haenggi, above n 107, 531. 178 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the Protection of Individuals With Regard to the Processing of Personal Data and on the Free Movement of Such Data [1995] OJ L 281; Protection of Personal Data (1 February 2011) European Commission <http://europa.eu/legislation_summaries/information_society/data_protection/l14012_en.htm>. The Directive broadly defines personal data as ‘any information relating to an identified or identifiable natural person’, extending to all information which may be connected to an individual: Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the Protection of Individuals With Regard to the Processing of Personal Data and on the Free Movement of Such Data [1995] OJ L 281 art 2(a); European Union Article 29 Data Protection Working Party, Opinion 4/2007 on the Concept of Personal Data, 01248/07/EN WP 136 Final (2007). The Article 29 Working Party states that personal data extends to any objective or subjective information, opinion or assessment, both sensitive and general: European Union Article 29 Data Protection Working Party, Opinion 4/2007 on the Concept of Personal Data, 01248/07/EN WP 136 Final (2007). 179 Data Protection Act 1998 (UK) c 29. 180 Proposal for a Regulation of the European Parliament and of the Council on the Protection of Individuals with Regard to the Processing of Personal Data and on the Free Movement of Such Data (General Data Protection Regulation) (25 January 2012) <http://ec.europa.eu/justice/data-protection/document/review2012/com_2012_11_en.pdf>; Protection of Personal Data (1 February 2011) European Commission <http://europa.eu/legislation_summaries/information_society/data_protection/l14012_en.htm>. 181 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the Protection of Individuals With Regard to the Processing of Personal Data and on the Free Movement of Such Data [1995] OJ L 281, art 1. The Regulation removes the direct reference to ‘privacy’, rather referring to the protection of personal data, but it is likely that this change does not imply the denial of privacy as an underlying aim of the Regulation: arts 1, 2; Luiz Costa and Yves Poulett, ‘Privacy and the Regulation of 2012’ (2012) 28 Computer Law and Security Review 254, 255. 182 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the Protection of Individuals With Regard to the Processing of Personal Data and on the Free Movement of Such Data [1995] OJ L 281, art 2(a); European Union Article 29 Data

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clearly be the case where the photograph is tagged in some way. The current reforms aim to strengthen privacy rights in online personal data and includes a proposed right to be forgotten, which is discussed below.183 The DPA operates in a similar manner to the Australian Privacy Act and is subject to similar limitations in respect of personal use.184 Since its adoption, various measures have been implemented to protect personal data, including Article 8 of the Charter of Fundamental Rights of the European Union (“CFREU”) and Article 16 of the Treaty on the Functioning of the European Union, which affords individuals the right to protection of their personal data.185 In addition, Article 8 of the Convention grants the right to respect for one’s private and family life.186 Intrusions may, however, be justified under Article 8(2), including where necessary for the protection of the rights and freedoms of other individuals.187 Further, the UK common law protects privacy by way of an extended action for breach of confidence, protecting against the unauthorised use of personal information.188 A plaintiff must establish that he or she had a reasonable expectation of privacy in information and that there is no countervailing right

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Protection Working Party, Opinion 4/2007 on the Concept of Personal Data, 01248/07/EN WP 136 Final (2007). 183 Proposal for a Regulation of the European Parliament and of the Council on the Protection of Individuals with Regard to the Processing of Personal Data and on the Free Movement of Such Data (General Data Protection Regulation) (25 January 2012) <http://ec.europa.eu/justice/data-protection/document/review2012/com_2012_11_en.pdf>; Protection of Personal Data (1 February 2011) European Commission <http://europa.eu/legislation_summaries/information_society/data_protection/l14012_en.htm>. 184 Data Protection Act 1998 (UK) c 29, s 36. 185 Charter of Fundamental Rights of the European Union [2010] OJ C 83/02, art 8; Treaty on the Functioning of the European Union, opened for signature 7 February 1992, [2010] OJ C 83/49 (entered into force 1 November 1993), art 16. 186 Convention for the Protection of Human Rights and Fundamental Freedoms, opened for signature 4 November 1950, 213 UNTS 221 (entered into force 3 September 1953), art 8(1). 187 Ibid art 8(2). 188 See generally Douglas v Hello! Ltd (No 2) [2006] QB 125; Campbell v Mirror Group Newspapers Ltd [2004] 2 AC 457; Johnston, above n 107, 4.

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to freedom of expression which justifies overriding this expectation.189 For example, in Campbell v Mirror Group Newspapers Ltd, the majority of the House of Lords determined that Naomi Campbell had a reasonable expectation of privacy in relation to the publication of photographs of her attending a Narcotics Anonymous meeting.190 The highly private nature of this activity justified restraint of the competing freedom of expression right.191 The UK Human Rights Act has supported the development of this cause of action, by providing a reference point for balancing privacy and freedom of expression rights.192 Courts have acknowledged that the values contained in Articles 8 and 10 of the Convention form part of the cause of action for breach of confidence,193 thus recognising the co-existence of these two rights. Importantly, EU jurisprudence has long recognised that privacy rights can exist in photographs taken in public. This applies where a photograph or video footage extends beyond what a person passing by would observe and where an individual has a reasonable expectation of privacy.194 Whilst a person who enters the public sphere must accept he or she may be photographed, this does not mean such photographs should be widely disseminated.195 Courts tend to draw a distinction between photographs in which a person is

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!189 Author of a Blog v Times Newspapers Ltd [2009] EWHC 1358 (QB), [7] (Eady J); Victorian Law Reform Commission, above n 9, 131; Campbell v Mirror Group Newspapers Ltd [2004] 2 AC 457, [85]–[86] (Lord Hope), [134], [137] (Baroness Hale); Douglas v Hello! Ltd (No 2) [2006] QB 125, [44]–[45], [100] (Lord Phillips MR and Clarke and Neuberger LJJ); Johnston, above n 107, 4. 190 [2004] 2 AC 457. 191 See generally ibid. 192 Human Rights Act 1998 (UK) c 42, s 12; Douglas v Hello! Ltd (No 2) [2006] QB 125, [53] (Lord Phillips MR and Clarke and Neuberger LJJ). 193 Campbell v Mirror Group Newspapers Ltd [2004] 2 AC 457, [16], [19] (Lord Nichols), [84], [86], [105] (Lord Hope), [130] (Baroness Hale); Amber Melville-Brown, ‘Camera Shy- The Interaction Between the Camera and the Law of Privacy in the UK’ (2008) 22(3) International Review of Law Computers & Technology 209, 212. 194 In Campbell v Mirror Group Newspapers Ltd [2004] 2 AC 457, the House of Lords held that in the case of personal and confidential photographs, there would be a reasonable expectation of privacy. This is demonstrated by Jagger v Darling, where an injunction was awarded to prevent publication of photographs depicting Jagger engaging in sexual activity in a nightclub. She had a reasonable expectation of privacy as she was in a discrete, secluded area of the nightclub: [2005] EWHC 683 (Ch) (9 March 2005), [13]–[14] (Bell J). See also Peck v United Kingdom [2003] I Eur Court HR 123; Von Hannover v Germany (No 2) [2012] I Eur Court HR 399. 195 Campbell v Mirror Group Newspapers Ltd [2004] 2 AC 457, [73] (Lord Hoffmann).

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incidentally depicted and those which are intentionally and surreptitiously taken.196

B Copyright The Convention protects an individual’s ‘peaceful enjoyment of his possessions’.197 ‘Possessions’ have been held to include intellectual property rights, such as copyright.198 An intellectual property right will constitute a possession where there is a legitimate expectation of obtaining that right.199 Copyright is also protected in the CFREU, which grants rights to one’s possessions and specifically provides that ‘intellectual property shall be protected’.200 In the UK, copyright is protected under the Copyright, Designs and Patents Act 1988 (UK),201 which operates in a similar manner to the Australian Copyright Act. There has been no specific consideration of the implications of the protection of property under the UK Human Rights Act.

C Freedom of Expression Article 10 of the Convention grants individuals the right to freedom of expression.202 Article 10(2) provides an exception where necessary to the protection of the reputation or rights of others and thus, as with Article 8, this

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!196 Ibid [122] (Lord Hope). In the Quebec case of Aubry v Éditions Vice-Versa Inc, the court distinguished between incidentally appearing in a photograph taken in public and cases where the public place was being used to photograph a specific individual: [1998] 1 SCR 591, [59], [61]. 197 Convention for the Protection of Human Rights and Fundamental Freedoms, opened for signature 4 November 1950, 213 UNTS 221 (entered into force 3 September 1953), as amended by Protocol No 11 to the Convention for the Protection of Human Rights and Fundamental Freedoms, opened for signature 11 May 1994, ETS No 155 (entered into force 1 November 1998), art 1. 198 Anheuser-Busch Inc v Portugal [2007] I Eur Court HR 1, [72]; Melnychuk v Ukraine (dec.) [2005] IX Eur Court HR 397, [3]; Ashdown v Telegraph Group Ltd [2002] Ch 149, 156 (Lord Phillips MR). 199 Anheuser-Busch Inc v Portugal [2007] I Eur Court HR 1, [65]. Where copyright need not be registered, as in Australia, copyright protection is warranted when a person takes a photograph, at which point they have a legitimate expectation of rights in it. 200 Charter of Fundamental Rights of the European Union [2010] OJ C 83/02, art 17(2). 201 Copyright, Designs and Patents Act 1988 (UK) c 48. 202 Convention for the Protection of Human Rights and Fundamental Freedoms, opened for signature 4 November 1950, 213 UNTS 221 (entered into force 3 September 1953), art 10(1).

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right is not absolute.203 Further, freedom of expression receives protection under the UK Human Rights Act, but there is no positive right to enforce it.204 The Directive acknowledges the existence of a right to freedom of expression. Article 9 and Recital 37 require Member States to introduce exemptions or derogations from certain provisions in order to balance freedom of expression with the protection of personal data in relation to the processing of data for journalistic purposes or literary or artistic expression.205 It has been suggested that this extends not only to media journalism, but to any person who publicly discloses information, opinions or ideas, using any form of medium,206 thus extending to the citizen journalist present on Facebook, as well as those posting literary or artistic works.207

D Resolving the Tensions The EU has a strong focus on human rights, evidenced by the existence of the European Court of Human Rights (“ECHR”) and the Convention. The three competing rights are granted equal human right protection in the Convention. This is in contrast to Australia, which does not grant constitutional protection for any of these rights (although both privacy and freedom of expression are recognised as human rights in the Victorian Charter) and the US, which only protects freedom of speech and does not offer any constitutional or human rights protection to either privacy or copyright. The rights may only be interfered with in accordance with the law or in pursuit of the legitimate aims

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!203 Ibid art 10(2); Parliamentary Assembly of the Council of Europe, Resolution 1165 – Right to Privacy (1998) [11] <http://assembly.coe.int/main.asp?Link=/documents/adoptedtext/ta98/eres1165.htm>. 204 Human Rights Act 1998 (UK) c 42, s 12. 205 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the Protection of Individuals With Regard to the Processing of Personal Data and on the Free Movement of Such Data [1995] OJ L 281, recital 37, art 9. The European Court of Justice has acknowledged the need to balance the objectives in Article 1, including the right to privacy, with the fundamental right to freedom of expression: Tietosuojavaltuutettu v Satakunnan Markkinapörssi Oy, Satamedia Oy (C-73/07) [2008] ECR I-09831, [56]. 206 Tietosuojavaltuutettu v Satakunnan Markkinapörssi Oy, Satamedia Oy (C-73/07) [2008] ECR I-09831, [62]. 207 Marsoof, above n 44, 125.

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set out in the Articles.208 Such interferences must be proportionate to these legitimate aims and in pursuit of a pressing social need.209 The Convention inevitably leads to conflicts between the rights, yet their inclusion in a single document indicates their reconcilability.210 However, the Convention fails to place these rights in a hierarchical order or to detail a method for resolving conflicts.211 This expressly requires the balancing of these rights on a case-by-case basis, with neither right given automatic priority. Whilst the Convention does not specify which right will prevail, the existence of the Directive suggests that the EU tends to protect personal privacy over competing rights. Article 9 of the Directive does, however, acknowledge a place for freedom of expression.

1 Privacy Versus Copyright This tension has been dealt with in the context of infringements of copyright works by Internet users.212 Courts have held that the installation of a filtering system to avoid copyright infringement would breach the right to protection of personal data.213 The courts specifically noted that nothing in the EU law or

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!208 Campbell v Mirror Group Newspapers Ltd [2004] 2 AC 457, [139] (Baroness Hale). 209 Ibid [139] (Baroness Hale). 210 Marsoof, above n 44, 124. 211 Parliamentary Assembly of the Council of Europe, Resolution 1165 – Right to Privacy (1998) [11] <http://assembly.coe.int/main.asp?Link=/documents/adoptedtext/ta98/eres1165.htm>; Steven Greer, ‘“Balancing” and the European Court of Human Rights: A Contribution to the Habermas-Alexy Debate’ (2004) 63(2) Cambridge Law Journal 412, 418. 212 In Scarlet Extended SA v Société belge des auteurs, compositeurs et éditeurs SCRL (“SABAM”) (Court of Justice of the European Union, C-70/10, 24 November 2011), Internet users were utilising Scarlet’s Internet server to download SABAM’s works without consent or royalty payments. Similarly, users of Netlog NV’s social networking platform were making use of SABAM’s works on their personal profiles without permission and without paying royalties: Belgische Vereniging van Auteurs, Componisten en Uitgevers CVBA (“SABAM”) v Netlog NV (Court of Justice of the European Union, C-360/10, 16 February 2012). The courts also considered the conflict between copyright and the right to freedom of expression. 213 Scarlet Extended SA v Société belge des auteurs, compositeurs et éditeurs SCRL (Court of Justice of the European Union, C-70/10, 24 November 2011), [53]; Belgische Vereniging van Auteurs, Componisten en Uitgevers CVBA v Netlog NV (Court of Justice of the European Union, C-360/10, 16 February 2012), [47]–[48]. In Scarlet Extended SA v SABAM, the personal data related to the processing of the users’ IP addresses, whereas in Netlog NV v SABAM, the information was protected as personal data as it enabled the users to be identified: Scarlet Extended SA v Société belge des auteurs, compositeurs et éditeurs SCRL

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case law indicates that copyright is inviolable or must be protected against all other rights.214 The UK Copyright Act directly recognises this conflict by granting privacy rights to the subject of a photograph where he or she has commissioned the taking of it.215 This approach provides a useful way of addressing the complex interplay existing between these rights by recognising that the subsistence of copyright in information does not necessarily preclude the existence of privacy rights in the information. The Act recognises, to an extent, copyright as a positive right by stating a person has the right to exhibit and publish photographs, unless limited by the relevant provision.

2 Privacy Versus Freedom of Expression Whilst recognising the importance of freedom of expression, the ECHR has acknowledged that ‘its jurisprudence does not… give article 10(1) the presumptive priority which is given… to the First Amendment’.216 There is no consistent approach adopted for dealing with this conflict and neither right is given automatic priority.217 Rather, qualification of one right in favour of the other may be necessary, dependent on the facts of the case.218 This tension has been dealt with in the context of autobiographies. When a person wishes to publish his or her own story, it inevitably interacts with the lives, and thus the privacy rights, of others mentioned within. This occurred in McKennitt v Ash, in which Ash’s autobiography detailed private information

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!(Court of Justice of the European Union, C-70/10, 24 November 2011), [26]; Belgische Vereniging van Auteurs, Componisten en Uitgevers CVBA v Netlog NV (Court of Justice of the European Union, C-360/10, 16 February 2012), [49]. 214 Scarlet Extended SA v Société belge des auteurs, compositeurs et éditeurs SCRL (Court of Justice of the European Union, C-70/10, 24 November 2011), [43]; Belgische Vereniging van Auteurs, Componisten en Uitgevers CVBA v Netlog NV (Court of Justice of the European Union, C-360/10, 16 February 2012), [41]. 215 Copyright, Designs and Patents Act 1988 (UK) c 48, s 85. This grants the subject the right to prevent the work being exhibited or shown to, communicated to or copies being issued to, the public. Similarly, the Austrian Copyright Act provides that ‘portraits of persons may not be exhibited or otherwise distributed… if legitimate interests of the person portrayed… would be prejudiced’: Federal Law on Copyright in Works of Literature and Art and on Related Rights (Austria) 1 July 1936, BGBI I, 2011, § 78(1). 216 Douglas v Hello! Ltd [2001] QB 967, [135] (Sedley LJ). 217 Ibid [150] (Keene LJ). 218 Campbell v Mirror Group Newspapers Ltd [2004] 2 AC 457, [55] (Lord Hoffmann).

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of McKennitt, a renowned singer and composer.219 The court held in favour of McKennitt’s privacy rights.220 This may, however, have been due firstly, to McKennitt’s public status and secondly, because it arguably went beyond a typical autobiography by being explicitly linked to and dependent on Ash’s relationship with McKennitt. Therefore, no consistent approach has been adopted to deal with this tension. The right to privacy tends to prevail where there is no justifiable public interest sufficient to warrant the breach of privacy (such as where it serves purely entertainment purposes).221 However, freedom of expression has been held to prevail where the public’s legitimate right to know and gain access to information is restrained by privacy rights.222 The European Court of Justice (“ECJ”) has voiced its concern over conflicts being determined on a case-by-case basis,223 thus disapproving of the current photograph removal policy employed by Facebook. Whilst the policy is based on the privacy laws of the country in which the subject lives, this undoubtedly still requires Facebook to make a judgement decision, potentially imposing unnecessary burdens upon Facebook.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!219 [2008] QB 73. 220 See generally McKennitt v Ash [2008] QB 73. 221 For example, in Campbell v Mirror Group Newspapers Ltd, the majority held that the protection of the intimacies of Naomi Campbell’s private life was sufficient to justify limiting the press’s freedom of expression: [2004] 2 AC 457. Similarly, in Von Hannover v Germany, varying judgments were delivered at different stages of the appeal. However, the prevailing approach adopted was that the publication of photographs of Caroline Von Hannover, a member of the Royal Family, was a breach of her right to privacy, as the photographs purely served entertainment interests: See generally Von Hannover v Germany (No 2) [2012] I Eur Court HR 399. Finally, in the case of Murray v Big Pictures (UK) Ltd, the court held that it was likely that, in relation to surreptitious photographs of JK Rowling’s infant son, the balance would fall in favour of the son’s right to privacy: [2008] 3 WLR 1360. 222 For example, Google Spain SL and Google Inc v Agencia Española de Protección de Datos and Mario Costeja González involved a request to remove content appearing on Google which was sourced from the electronic version of a Spanish newspaper article. The Advocate-General of the ECJ ruled in favour of freedom of expression, as the public’s right to information would be hindered if Google did not reflect the real and accurate results, but rather a censored version of it: (Court of Justice of the European Union, C-131/12, 25 June 2013), [131]. A judgment from the ECJ is yet to come. 223 This is due to the burden imposed on controllers processing personal data and the potential for certain content to be automatically withdrawn, amounting to censorship by a private party: ibid [134].

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The UK extended action for breach of confidence specifically acknowledges this tension. Courts are required to determine whether information is private, so as to justify preventing its publication,224 by considering whether disclosure would be highly offensive to a reasonable person and whether there is a public interest in disclosure.225

E The Right to be Forgotten An issue under active consideration in the EU in the context of the proposed Regulation concerns the right to be forgotten, in particular, surrounding the desirability of legislatively mandating it and the appropriate scope of such a right.226 The right to be forgotten grants individuals a legal basis on which to compel the removal of their personal information when it is no longer needed for legitimate purposes.227 This is essentially a right of data protection and information privacy. The Directive grants individuals the right to erase or block data and prevent the processing of data.228 However, the ECJ has held that Directive rights do not amount to a right to be forgotten.229 Yet the Regulation goes further and does grant this right. Under the Regulation, individuals have the right to obtain the erasure of their personal data and to prevent its further dissemination where an individual has simply withdrawn consent (especially if such data was made available when they were a child).230

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!224 See generally Campbell v Mirror Group Newspapers Ltd [2004] 2 AC 457. 225 Ibid [22] (Lord Nichols), [96] (Lord Hope), [166] (Lord Carswell). 226 Proposal for a Regulation of the European Parliament and of the Council on the Protection of Individuals with Regard to the Processing of Personal Data and on the Free Movement of Such Data (General Data Protection Regulation) (25 January 2012), art 17 <http://ec.europa.eu/justice/data-protection/document/review2012/com_2012_11_en.pdf>; Costa and Poulett, above n 181, 256-7. For UK criticisms of the right, see generally Owen Bowcott, ‘Britain Seeks Opt-Out Of New European Social Media Privacy Laws’, The Guardian (online), 4 April 2013 <http://www.guardian.co.uk/technology/2013/apr/04/britain-opt-out-right-to-be-forgotten-law>. 227 Walker, above n 142, 101, 105. 228 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the Protection of Individuals With Regard to the Processing of Personal Data and on the Free Movement of Such Data [1995] OJ L 281, arts 12(b), 14(a). 229 Google Spain SL and Google Inc v Agencia Española de Protección de Datos and Mario Costeja González (Court of Justice of the European Union, C-131/12, 25 June 2013). 230 Proposal for a Regulation of the European Parliament and of the Council on the Protection of Individuals with Regard to the Processing of Personal Data and on the Free Movement of Such Data (General Data Protection Regulation) (25 January 2012), art 17

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This right places control of personal data back in the hands of users, rather than website operators.231 The right to be forgotten clearly impacts upon freedom of expression. The Regulation therefore creates an exception to the right where retention of data is necessary to protect free speech.232 Due to the strong US First Amendment protection, this right could only operate in a limited manner in the US to facilitate the removal of data posted by the individual personally.233 This is demonstrated by the limited right to be forgotten that has recently been introduced in California, as discussed above. Further, given the Directive does not operate in relation to material of a personal nature posted by others,234 the operation of the right to be forgotten in relation to this paper is limited, as it would not allow the removal of a personal photograph which infringes privacy.

IV CONCLUSION Evidently, the US and the EU have adopted differing approaches to dealing with these tensions. Developments in the US seem to offer minimal guidance due to the impact of the First Amendment, which skews the balance strongly in favour of freedom of expression at the expense of privacy, with copyright receiving a similar level of protection to that in Australia. The EU and, in particular, the UK arguably more broadly provide insights concerning the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!<http://ec.europa.eu/justice/data-protection/document/review2012/com_2012_11_en.pdf>. Further, Article 17(2) requires a controller, who has made personal data public, to take all reasonable steps to inform third parties who are processing this data that the subject requests them to delete any links to, copy or replication of that personal data. 231 Bowcott, above n 226. 232 Proposal for a Regulation of the European Parliament and of the Council on the Protection of Individuals with Regard to the Processing of Personal Data and on the Free Movement of Such Data (General Data Protection Regulation) (25 January 2012), art 17(3)(a) <http://ec.europa.eu/justice/data-protection/document/review2012/com_2012_11_en.pdf>. 233 Walker, above n 142, 101; Steven C Bennett, ‘The “Right To Be Forgotten”: Reconciling EU and US Perspectives’ (2012) 30(1) Berkeley Journal of International Law 161, 169. Some argue that children should be granted more leniency in “forgetting” data created in their youth, as is recognised in the Californian right to seek removal: at 166-7. 234 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the Protection of Individuals With Regard to the Processing of Personal Data and on the Free Movement of Such Data [1995] OJ L 281, art 3.

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possibility of a balanced approach. This is achieved through the existence of equal protection afforded to each right under the Convention. It is arguable that what is called for in Australia is a balanced approach which draws on these insights, but one which achieves an outcome that leads to a greater degree of clarity for those involved. The ALRC’s ‘Serious Privacy Invasions in the Digital Era’ inquiry will consider the introduction of a right to be forgotten, with consideration of competing freedom of expression interests.235 It is likely that the formulation of this right in Australia will be guided by the developments in the EU and US.

5 Proposed Solution

I INTRODUCTION Returning to the hypothetical scenarios posited, what is required is a legal framework that protects a person in Sarah’s position, but not at the expense of individuals in Jane’s position. It is clear that the current Australian legal framework is inadequate for achieving this. Whilst analysing the positions in the US and EU is useful, these approaches do not sufficiently resolve the tensions or offer a solution for Australia. The US fails to adequately protect privacy rights, predominantly due to the weight it attaches to free speech. Whilst the EU achieves a better balance between the three rights, it fails to provide a simple mechanism for resolving tensions between them. Rather, courts undertake a case-by-case balancing act, which can result in inconsistency. Further, such an approach may be impractical to implement in Australia given that these rights are not granted equal human rights protection. Therefore, Australia needs to develop a solution better suited to its particular circumstances.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!235 Attorney-General’s Office, ‘Protecting Privacy in the Digital Era’ (Media Release, 12 June 2013); Australian Law Reform Commission, Serious Invasions of Privacy in the Digital Era, Terms of Reference (12 June 2013) <http://www.attorneygeneral.gov.au/Mediareleases/Pages/2013/Second%20quarter/12June2013-Protectingprivacyinthedigitalera.aspx>.

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Arguably, this solution needs to focus on protecting privacy. This is due to the lack of protection afforded to privacy and the very public nature of social media websites, which enables individuals to widely disseminate information instantaneously. The unprecedented publication method provided by social media creates the possibility of privacy invasions of a magnitude unimaginable in a pre-Internet age. Neither the existing information privacy laws nor the common law action for breach of confidence can be applied to this unique context and therefore are entirely insufficient to protect against privacy invasions in the digital era. Any solution seeking to better protect privacy needs to extend to photographs captured in public as well as in private, given the ease of taking photographs, the permanency of photographs and their ability to be viewed out of context. However, whilst increasing privacy protection is of paramount importance, the solution needs to be sufficiently nuanced to ensure it simultaneously offers adequate protection to freedom of expression and copyright. Privacy protection cannot merely be increased at the expense of these other rights. Therefore, any solution must give due weight to competing interests and a method for resolving tensions. This is best achieved by tailoring any solution to the specific context in which the issue arises.

II THE WAY FORWARD Legislators around the globe have begun to recognise the legal issues arising out of Internet use and, in particular, social media use. The tensions discussed in this paper are part of a broader social media issue, which is attracting attention around the world, particularly in the context of the right to be forgotten. Social media related issues are vast and include, for example, cyberbullying, use by child sex offenders, identity theft and the blurring of distinctions between work and personal life, which creates novel issues in the employment context. Whilst these issues exist in an offline context as well, they are likely to be more insidious than their offline equivalent and occur at a greater magnitude and frequency.

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Over time a form of ‘netiquette’ and system of self-regulation on the Internet has developed,236 yet this is insufficient to govern all online situations and might not always be adhered to. In Australia, the beginning steps are being taken to address certain social media related issues, for example, the ‘Serious Invasions of Privacy in the Digital Era’ inquiry being undertaken by the ALRC, as well as laws which seek to address specific issues, for example, the dissemination of upskirt photographs on the Internet.237 Similarly, an array of guidelines and policies have been developed to address social media issues, which demonstrates the need for broader legislative action.238 To date, steps towards dealing with the array of social media issues have largely been confined to hate speech.239 However, it is argued that the social media landscape raises issues that are sufficiently serious and different from those arising offline such as to warrant a sui generis regime. A sui generis regime

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!236 Trotter Hardy, ‘The Proper Legal Regime for “Cyberspace”’ (1994) 55 University of Pittsburgh Law Review 993, 1010; Yee Fen Lim, ‘Law and Regulation in Cyberspace’ (Paper presented at Proceedings of the 2003 International Conference on Cyberworlds, Singapore, 3-5 December 2003) 3-4. ‘Netiquette’ refers to a set of social norms which govern Internet use. 237 See, eg, Australian Law Reform Commission, Serious Invasions of Privacy in the Digital Era, Terms of Reference (12 June 2013) <http://www.attorneygeneral.gov.au/Mediareleases/Pages/2013/Second%20quarter/12June2013-Protectingprivacyinthedigitalera.aspx>; Summary Offences Amendment (Upskirting) Act 2007 (Vic). 238 For example, Australia has taken measures to govern liability for user comments on a company’s social media website page, with various bodies developing guidelines, yet these have not been confirmed in law: See, eg, Best Practice for User Comment Moderation (July 2013) Interactive Advertising Bureau Australia <http://www.iabaustralia.com.au/-/media/IAB/Resources/Presentations%20and%20Guidelines/Best%20Practice%20for%20User%20Comment%20Moderation.ashx>; Best Practice Guideline – Responsible Marketing Communications in the Digital Space (26 November 2012) Australian Association of National Advertisers <http://www.aana.com.au/codes/AANA_Best_Practice_Guide_Marketing_Digital_Space-26112012.pdf>; Social Media, Australian Competition and Consumer Commission <http://www.accc.gov.au/business/advertising-promoting-your-business/social-media>. Further, social media policies relating to use in the workplace have been developed. For example, a sample policy is provided by Business Victoria and various State Governments have developed policies for their employees: HR Policy and Procedure Manual Template (1 August 2013) Business Victoria <http://www.business.vic.gov.au/operating-a-business/employing-and-managing-people/recruiting-staff/workforce-planning>; Victorian Government, Social Media Policy- Department of Justice (March 2011) eGovernment Resource Centre <http://www.egov.vic.gov.au/victorian-government-resources/government-initiatives-victoria/law-and-justice-victoria/social-media-policy-department-of-justice.html>. Finally, the Coalition is developing an initiative to deal with cyberbullying, requiring Facebook and Twitter to remove material that is harmful to teenagers: Chris Griffith, ‘Facebook, Twitter Top Agenda as Cyber Bulling Policy Takes Shape’, The Australian (online), 1 October 2013 <http://www.theaustralian.com.au/technology/facebook-twitter-top-agenda-as-cyber-bullying-policy-takes-shape/story-fn4htb9o-1226730224396>. 239 Liau Yun Qing, ‘Singapore, Malaysia Unlikely to Implement Social Media Laws’, ZDNet (online), 1 October 2012 <http://www.zdnet.com/singapore-malaysia-unlikely-to-implement-social-media-laws-7000005010/>.

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would synthesise the law, given that a single law could be introduced to deal with the broad range of issues, rather than amending various corresponding legislation to include a social media element. As an example, the single social media statute could deal with privacy on social networking websites, rather than requiring amendment of the Privacy Act. Social media is arguably well-suited for a sui generis statutory solution due to the very specific and technical nature of the issues which it creates. Various issues arising in the social media context are novel by reason of the nature of communications in the online world. They vary markedly from, occur in different contexts to or have no equivalent in the offline world.240 The ability to post a humiliating photograph of another person on a social networking website has far more effect and consequence than placing the same photograph on a bulletin board, where the individual is less likely to be identified and the photograph is likely to be viewed predominantly by strangers. Further, whereas the presence of the photograph on the Internet remains within the control of the poster (or those who have re-posted the photograph), in the offline world this humiliating photograph may be taken down by a concerned passer-by. This viral ability of social media is vastly different to its offline comparison, where the photograph may need to be displayed on national television to receive the same audience. Further, whilst many of these social media issues are not unique, they tend to arise far more frequently and at a greater magnitude than when offline, given the ubiquity of social networking use. The effect of privacy invasions on the Internet are far greater than for other forms of communication due to the Internet’s large potential audience and because information is easily discoverable using search engines. Therefore, established legal principles cannot simply be transposed to social media.241 Whilst increasing privacy protection is paramount, this cannot be achieved in a vacuum through existing privacy legislation. Rather, a tailored approach needs to be taken, which is moulded to the requirements of social

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!240 Hardy, above n 236, 1001, 1053-4; Lim, above n 236, 3. 241 Lim, above n 236, 2-3.

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media and is directly applicable to the situation in which these legal issues arise. A social media solution allows for a more nuanced and integrated approach, which balances the competing rights in a social media context. In our globalised online world, social media has transformed the meaning of ‘friends’, enabled the incomparable mass dissemination of information and facilitated communications across the globe. While specific social media websites may come and go, social media has become ingrained as a central part of life and it is most probable that social media is here to stay for the long term in some form. The issues arising in this context, and in particular the potential for serious invasions of privacy, will only become more prevalent. It is for this reason that a comprehensive and tailored approach is required and why the social media context is well-suited for a sui generis law. The solution to be adopted in Australia needs to take into account the differences that exist between the various social media websites, whilst at the same time remaining technologically neutral. Some websites, such as Facebook or MySpace, are all-rounded in that they enable one to post photographs, videos or comments and engage in private messages or chats. Other websites, such as Instagram or LinkedIn, are more tailored in that they only facilitate certain actions, such as posting photographs. LinkedIn, in particular, raises novel concerns given its professional context. The potential for misrepresentation of one’s skills, training, qualifications and work history raises profound issues in the employment context. Whilst it is possible that such misrepresentations would fall within the scope of other laws, such as misleading and deceptive conduct, its unique nature demonstrates the need for a more specific, tailored approach. In respect of the uploading of photographs and the subject of this paper, a two-part solution is proposed: a Code of Conduct (“Code”), which may form a part of the Statement of Rights and Responsibilities or similar terms of use agreements applicable to Australian users of social networking websites,242

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!242 New Facebook users are required to agree to the Statement of Rights and Responsibilities upon registering and creating an account. This Statement states that by using or accessing

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and a set of provisions enabling Australian users to obtain redress in certain circumstances. The regime would be enforceable against other Australian users and social media websites that are subject to the jurisdiction of Australian courts and regulators,243 which would not include Facebook except to the extent that its photograph removal policy relies on Australia’s privacy laws. This is due to the jurisdictional limitations of legislating the Internet, where traditional notions of territoriality and sovereignty do not apply.244 Whilst the Internet transcends national borders and has created an interconnected world, photographs posted of a person are most often going to be posted by another Australian. Where this is not the case, the most the subject can do is request the removal of the photograph (if it complies with the Code) in accordance with Facebook’s policy. He or she cannot sue the photographer or Facebook itself. The regime’s application would operate independently of the jurisdiction in which Australian users’ data is being processed, which tends to be the US.245 The Code would operate as implied terms in the contract between Australian users and social networking websites and would also create binding obligations as between Australian users. Given that the focus of this paper has been on photographs and Facebook, the law is discussed in this context, however, it would apply to all social networking websites and could provide the model for regulation of all content posted by users. The Code would extend to all photographs, whether or not the individual is tagged, but subject to certain exceptions as outlined below. The ability to identify a person in a photograph by their image alone is sufficient to warrant protection because, for example, the photograph of Sarah’s exposed underwear is humiliating even if she is not “tagged”.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Facebook, a person agrees to the Statement as updated from time to time. Existing users are notified of any changes to the Statement and the continued use of Facebook constitutes an acceptance of these changed terms: Statement of Rights and Responsibilities (11 December 2012) Facebook, s 14 <http://www.facebook.com/legal/terms>. 243 In the case of a social networking website that is subject to the laws of Australia, the provisions of the proposed law would operate as a notice and take down scheme, similar to those discussed and proposed by the Standing Committee of Attorneys-General and the ALRC: Standing Committee of Attorneys-General, above n 28, 23, 35; Australian Law Reform Commission, above n 17, 456-9, 2331-2. 244 Lim, above n 236, 3; Bennett, above n 233, 182. 245 Bennett, above n 233, 163.

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The proposed law would apply generally to social media, acknowledging that this is an umbrella term.246 An appropriate definition for the purposes of this law is ‘Internet-based tools for sharing and discussing information among people by which user-generated information, opinion and other content is shared over open digital networks’.247 The proposed Code would establish clear rules, which aim to establish an appropriate balance between the competing rights. The Code’s primary goal would be to promote and provide guidance concerning appropriate behaviour and practices on social networking websites. This “light touch” approach is arguably suitable given that many Facebook users are minors and given it is inappropriate to impose legal sanctions other than in exceptional cases. The Code would take as its starting point the proposition that individuals are able to publish photographs of others, subject to certain exceptions which involve more serious invasions of personal privacy. These exceptions would include photographs that are humiliating, depict an individual in a state of undress or engaged in sexual activity, or are taken surreptitiously or without consent in circumstances in which the individual would have a reasonable expectation of privacy. This approach seeks to distinguish between innocuous photographs and those with the potential to cause harm. The law must not punish every photograph depicting another individual so must make allowances for banal photographs published in breach of another’s privacy. The Code would also confer on subjects of photographs the right to request that photographs of them be taken down or altered (including removing a “tag”) so as to de-identify them. Altering may be in the form of cropping the photograph to remove that portion depicting the individual concerned or

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!246 Coralie Kenny and Tahlia Gordon, ‘Social Media Issues for Legal Practice’ (2012) 50(3) Law Society Journal 66, 66. 247 This is based on the definition offered by the Victorian Department of Human Services: Victorian Department of Human Services, DHS Social Media Policy for Employees (16 April 2013) Victorian Department of Human Services Website <http://www.dhs.vic.gov.au/about-the-department/documents-and-resources/policies,-guidelines-and-legislation/social-media-policy-for-employees#content-heading-1>.

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pixelating the image of the individual concerned. The privacy right granted by the Code would provide the basis for the removal of photographs in accordance with Facebook’s policy, as discussed above. This right would, in turn, be subject to exceptions to protect freedom of expression and the appropriate exercise of copyright including where:-248

(a) the individual is not the main focus of a photograph and forms

only an incidental part;

(b) the individual’s presence in the photograph is innocuous and no harm or humiliation is caused to the individual; or

(c) the individual is unidentifiable or unlikely to be identified; and one or more of the following applies:- (d) the photograph serves as a form of political commentary or

citizen journalism; (e) the photograph depicts an integral event in the photographer’s

life; (f) the photograph depicts a mutual shared event in which the

individual has willingly participated;249 or (g) the photograph is disseminated for the purpose of artistic

expression and has strong artistic merit. This last factor (g) draws upon the originality debate discussed above, as arguably photographs with creative thought should be given greater

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!248 This broadly reflects the German Copyright Act which seeks to attain a balance between the right to privacy and copyright: Gesetz betreffend das Urheberrecht an Werken der bildenden Künste und der Photographie [Act Concerning the Copyright on Works of Fine Arts and Photography] (Germany) 9 January 1907, BGBI III, 1907, §§ 22, 23. 249 This exception is echoed in the SDA which permits use of an optical surveillance device if the individual is a party to the private activity: Surveillance Devices Act 1999 (Vic) s 7(1).

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protection than photographs taken with no effort or artistic merit. On this basis, Sarah’s great harm arguably warrants a restriction upon Pete’s freedom of expression and copyright interests such that she can request the photograph’s removal. In contrast, no real harm has been caused to Rob, due to the improbability of his identification and because he is not depicted in a humiliating manner. Therefore, Jane’s stronger interest in her artistic freedom of expression and right to publicly disseminate her artwork should not yield to Rob’s privacy right. The second part of the proposed solution would provide concrete mechanisms for seeking redress where an infringement of the Code is particularly egregious. Legal consequences would apply in two cases. The first is where a photograph has not been removed upon request in accordance with the Code. The second is where a person has posted a photograph in contravention of the Code and the subject of the photograph is able to demonstrate that:-

(a) he or she had a reasonable expectation of privacy, which extends to an expectation of not being photographed, including in public;

(b) he or she is identified or reasonably identifiable; (c) publication of this photograph is highly offensive to a person of

ordinary sensibilities;250 and (d) the individual has suffered a form of recognisable harm as a

result of publication. The third element (c) specifically deals with the tension between privacy and freedom of expression. As discussed above, the US imposes a high hurdle for

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!250 This concept of being highly offensive to a reasonable person initiated in the US; an element of three of its privacy torts: American Law Institute, Restatement (Second) of Torts (1977) §§ 652B, 652D, 652E. A similar threshold, highly offensive to a person of ordinary sensibilities, was proposed by the ALRC and the VLRC: Victorian Law Reform Commission, above n 9, 152; Australian Law Reform Commission, above n 17, 2567-8. Cf New South Wales Law Reform Commission, above n 114, 33.

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those whose privacy rights have been infringed, whereby privacy would only be prioritised over freedom of expression in extreme cases. Alternatively, the EU engages in a balancing act between the two rights, despite criticisms of balancing tests.251 Whilst the highly offensive test means that it is more difficult to establish an invasion of privacy, it is a more clear-cut test which would result in greater consistency. In determining whether these provisions have been infringed, a court would consider the age of the individual displayed (particularly whether they are a minor). Further, breaches of the proposed law would be determined according to an objective reasonable person test. It is possible that legal consequences may ensue even if the photograph has already been removed, given that privacy will have already been invaded. If successful, the subject would be entitled to compensatory damages and/or an injunction requiring the defendant to remove the photograph. Whilst privacy will have already been infringed once the photograph is posted, an injunction would prevent further dissemination, which may cause even greater harm. Further, exemplary or punitive damages may be awarded to punish the offender and act as a deterrent. Cases of this nature would be appropriately dealt with in the Federal Circuit Court, which would be responsible for enforcing these civil sanctions. The two parts of the proposed solution would operate in conjunction with one another. An individual could only sue when a photograph has been posted in breach of the Code. The Code then offers the court guidance in determining whose rights would prevail in the relevant situation. Legal consequences may then be imposed in accordance with the enforceable provisions. The proposed solution would be introducing a form of property right in private information, 252 granting individuals control over their personal

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!251 Many theorists oppose the balancing exercise as it results in decisions based on arbitrary judicial discretion rather than decisions based on the law: Greer, above n 211, 414. 252 Walker, above n 142, 112; West, above n 79, 615-6. Cf Tim Cole, ‘A Right to Forget?’ on Kuppingercole Analysts (7 August 2010)

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information, including having it deleted from the online sphere. This right is akin to the US right to one’s image as it acknowledges that individuals have a proprietary interest in and exclusive control over their identity and likeness (although it differs in that it is not restricted to commercial uses). Further, this right is comparable to Blackman’s proposed tort based on the right to one’s digital identity,253 discussed above. Further, the scheme would operate similarly to the right to be forgotten by granting individuals a legal basis on which to compel the removal of their personal information when it is not needed for legitimate purposes. This right is central to upholding the values underpinning the right to privacy, enabling individuals to redevelop themselves unhindered by past indiscretions.254 As the right to be forgotten directly conflicts with freedom of expression, there may be potential issues introducing this right to the extent that a photograph involves the exercise of free speech. The specific exception for political discussion in the Code partially deals with this, but it applies only where factors (a)–(c) are also present. It may, therefore, be necessary to include a defence based on political discussion in relation to the proposed statutory cause of action. Without protection in the digital world, these core basic rights may be compromised. The proposed social media law seeks to recognise and protect each of these rights. It grants individuals a statutory privacy right, which, by default, would prevail over other rights. Increased privacy protection is necessary given that currently it is totally trumped by the two competing interests. This privacy right would take precedence over the freedom of expression, except potentially political freedom of expression. It would operate as a positive restrictive element upon copyright. Copyright is a negative right, in that it does not grant photographers the right to publish their work, but to prevent others from doing so. Privacy would, therefore,

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!<http://blogs.kuppingercole.com/cole/2010/08/07/a-right-to-forget/> on the introduction of a digital expiration date. 253 See generally Blackman, above n 22, 354-88. 254 Chander, above n 25, 125; Costa and Poulett, above n 181, 257.

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trump copyright to the extent that the privacy right applies. 255 Yet the importance of these competing rights means that privacy must not completely obliterate them. The proposed solution should not cause a chilling of speech and the exclusive right to disseminate one’s work should not be inappropriately constrained. Rather, the rights must be balanced on a case-by-case basis, in accordance with the provisions, to determine which interest is the strongest. This solution is the most appropriate way to bring these three competing rights into equilibrium by not giving any right absolute protection.

III CHALLENGES WITH PROPOSED SOLUTION Due to ever-present and rapid technological developments, constant updating of laws is required. Therefore, it is important that the sui generis social media law is drafted, as far as possible, in a way that avoids the need for amendment. To achieve this, it should be drafted in technology neutral language where possible. Technological developments already pose a problem for the law. However, this proposed solution would necessitate amendment to only a single piece of legislation. It may be difficult to monitor breaches of the legislation, given the enforcement difficulties on the Internet. This is not a problem for the purposes of this paper, given that the onus would be on the subjects of photographs to enforce their rights and instigate civil action. The application of the proposed law, in particular the enforceable provisions, to minors is also problematic. Minors are far more likely to haphazardly upload photographs in breach of the Code without realising the consequences. Therefore, alternative legal consequences for minors may be appropriate, alongside education of the legal framework governing social media. The proposed solution also has limitations in preventing the harm flowing from photographs published in breach of the Code. It does, however, include measures to prevent the uploading of harmful photographs in the first place.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!255 Ashdown v Telegraph Group Ltd [2002] Ch 149, [30] (Lord Phillips MR).

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This problem is generally reflective of the reactive nature of the law, which seeks to redress harms after the fact. Additionally, despite Facebook’s photograph removal policy being based upon Australia’s laws, it is problematic to allow Facebook to act as the arbitrator in determining whether the Code has been infringed. A US-based company arguably should not be granted such decision-making power. Rather, it may be appropriate for Facebook to refer the decision to the Australian Privacy Commissioner, who is better equipped to make such determinations. Finally, a problem remains in relation to the jurisdictional issues surrounding the Internet. Global regulation has not occurred due to a lack of consensus between jurisdictions as to how to govern the Internet. 256 Therefore, Australian legislators cannot regulate the conduct of social media website operators, such as Facebook, which are not subject to Australian laws. Therefore, the proposed solution may be challenged to the extent that it requires social networking websites to import the Code into its terms of use agreements. However, it is possible that the solution could operate irrespective of its inclusion in such agreements. Further, individuals would have no redress where a photograph of them is posted by those outside of Australia who refuse to remove the photograph. In that case, the problem cannot be resolved unilaterally within Australia, but requires collaboration with other jurisdictions.

IV CONCLUSION In summary, this paper proposes a two-part solution including both a ‘soft law’ Code of Conduct,257 which offers guidance for appropriate social media behaviour, and legally enforceable provisions, applicable in limited more egregious circumstances. This approach ensures that social networking

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!256 Steven M Hanley, ‘International Internet Regulation: A Multinational Approach’ (1998) 16 Journal of Computer and Information Law 997, 1011. This is despite the acknowledgement that the unification of laws across borders is crucial for protecting personal data: Bennett, above n 233, 174. 257 A ‘soft law’ refers to quasi-legal instruments tending to complement traditional laws which are of weaker status than traditional laws.

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behaviour is not too heavily regulated, which would cause undesirable consequences such as the chilling of free speech. The solution focuses on granting statutory rights to individuals whose privacy rights have been infringed by photographs posted of them on social media. This would operate as a justifiable limitation on the freedom of expression and copyright in cases of identifiable harm. However, the right to privacy would not be absolute, as various exceptions would operate to ensure that freedom of expression and copyright interests are not unreasonably curtailed. Despite criticisms of the balancing exercise, a balancing of rights on a case-by-case basis is important for ensuring that no right is given absolute protection but rather that each right may yield to a stronger competing right. Despite its practical difficulties, this sui generis solution is worthy of attention from legislators in the future. A sui generis solution offers a simple, concise method of dealing with the multitude of issues arising from social media use, which cannot be dealt with through existing legislation. Social media, and its associated legal and social issues, has become so ubiquitous that the time for change is needed. Australia has taken steps to recognise basic human rights through various Conventions, yet fails to imbue them with proper protection. This solution is the most appropriate method of recognising these human rights and bringing a fair and equal balance to them by applying specific criteria on a case-by-case basis with a focus on the social media context.

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GIVING CREDIT ONLY WHERE CREDIT IS DUE: A PROPOSED STATUTORY SOLUTION TO OVERCOME

THE SHORTCOMINGS OF CREDIT RATING AGENCY LIABILITY

JENNIFER WONG

MONASH UNIVERSITY

Credit rating agencies have traditionally enjoyed great success in avoiding liability to investors for the publication of inaccurate credit ratings. Although the current Australian law imposes basic standards of care, skill and diligence on credit rating agencies, this essay contends that investors’ interests would be better protected under a statutory regime tailored specifically to credit rating agencies. The proposed reforms are modelled on the statutory action against manufacturers for defective products under s 138 of the Australian Consumer Law, and offer investors a simple, accessible cause of action against credit rating agencies. The proposed reforms will also establish a clear statutory standard to be met by credit rating agencies, shaped by Bathurst Regional Council v Local Government Financial Services [No 5] [2012] FCA 1200 (5 November 2012) and the International Organization of Securities Commission Code of Conduct Fundamentals for Credit Rating Agencies. The proposed reforms provide a practical solution to the present shortcomings of credit rating agency liability, and will promote fair and efficient financial markets into the future.

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I INTRODUCTION*

Although [credit rating agencies] cannot be expected to uncover issuer fraud

or conduct the level of confirmation expected of independent auditors, ratings

based on information that fails to pass even a basic ‘sniff test’ — or, more

importantly, methodologies which fail to take into consideration market

changes which may have an impact on the quality of the information upon

which the ratings are based — fundamentally undermine investor confidence

in the rating process. Consequently, investors and regulators expect [credit

rating agencies] to take reasonable steps to ensure that the information they use is of sufficient quality to support a credible rating.1

Credit rating agencies (‘CRAs’) have been touted as some of the most influential entities in today’s world. Indeed, in the opinion of New York Times columnist Thomas Friedman, ‘Moody’s Bond Rating Service’ represents ‘one of two superpowers in the world today’ (the other being the United States of America).2 While this view may be considered a little extreme, there is no doubt that CRAs wield an unparalleled degree of power in global financial markets.3 One of the main drivers for such dominance relates to CRAs’ ability to avoid being tangled up in the legal battlefield. Traditionally, CRAs have enjoyed great success in avoiding liability to investors for the publication of inaccurate credit ratings. Such has been the case even where the CRA’s actions clearly failed to meet the expected standard of care, skill and diligence of professional advisers.4

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!* The author would like to thank Professor Justin Malbon for his guidance and support in the preparation of this essay. Since the time of writing, the first instance decision which forms the basis of essay has been upheld by the Full Federal Court of Australia: see ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 (6 June 2014). 1 Technical Committee of the International Organization of Securities Commission (‘IOSCO’), ‘The Role of Credit Rating Agencies in Structured Finance Markets’ (Consultation Report, IOSCO, March 2008) 9. 2 John C Coffee Jnr, Gatekeepers: the Professions and Corporate Governance (Oxford University Press, 2006) 283–4, quoting PBS, ‘Interview with Thomas L Friedman’, The News Hour with Jim Lehrer, 13 February 1996; see also Frank Partnoy, ‘The Siskel and Ebert of Financial Markets? Two Thumbs Down for the Credit Rating Agencies’ (1999) 77 Washington University Law Quarterly 619, 620. 3 See, eg, Frank Partnoy, ‘Overdependence on Credit Ratings Was a Primary Cause of the Crisis’ in Douglas D Evanoff, Philipp Hartmann and George G Kaufman (eds), The First Credit Market Turmoil of the 21st Century (World Scientific, 2009) 175; Aline Darbellay and Frank Partnoy, ‘Credit Rating Agencies under the Dodd-Frank Act’ (2011) 30(12) Banking and Financial Services Policy Report 1, 2. 4 Much of this litigation has occurred in the United States, where CRAs have traditionally relied on the constitutional ‘First Amendment’ defence: see, eg, First Equity Corporation of

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Unsurprisingly, the global financial crisis of 2007–08 (‘GFC’) has triggered renewed debate as to whether this ‘immunity’ of CRAs against liability to investors should be sustained. A recent decision of the Federal Court of Australia, Bathurst Regional Council v Local Government Financial Services Pty Ltd [No 5],5 was the first major case in the world to find a CRA liable to investors for the publication of incorrect credit ratings. Jagot J’s first instance decision encapsulates the premise of this essay — namely, that CRAs should be held liable to investors for the publication of undeniably ‘wrong’ credit ratings.

CRAs must meet basic standards of care, skill and diligence in the performance of their work — particularly in light of the fact that other gatekeepers and professional service firms have not enjoyed the same degree of immunity. Although the law in its current form theoretically imposes some standards of care, skill and diligence applicable to CRAs, 6 the practical difficulties of establishing causes of action for breach of these standards have precluded effective enforcement. To overcome these obstacles, this essay contends that CRA liability for failing to satisfy basic standards of care, skill and diligence should be set out in a clear statutory regime with specific application to CRAs. This regime should provide tailored procedural and enforcement mechanisms, making it easier for an aggrieved investor to take action against the responsible CRA.

Part II of this essay outlines the role of CRAs in financial markets, and summarises the key regulatory problems faced by the credit rating industry.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Florida v Standard and Poor’s, 869 F 2d 175 (2nd Cir, 1989); Jefferson County School District v Moody’s Investor’s Services, 175 F 3d 848 (10th Cir, 1999). Application of this defence was subsequently rejected in Abu Dhabi Commercial Bank v Morgan Stanley and Co, 651 F Supp 2d 155 (SD NY, 2009) on the basis that the credit ratings were distributed to a select group of members under a private placement, as opposed to the public at large. For further discussion on the First Amendment defence, see Lisbeth Freeman, ‘Who’s Guarding the Gate? Credit-Rating Agency Liability as “Control Person” in the Subprime Credit Crisis’ (2009) 33 Vermont Law Review 585; Geneviève Brunner, ‘Is There a Change in the Regulation Landscape of Credit Rating Agencies?’ (2010) 28 Company and Securities Law Journal 222; Caleb Deats, ‘Talk that Isn’t Cheap: Does the First Amendment Protect Credit Rating Agencies’ Faulty Methodologies from Regulation?’ (2010) 110 Columbia Law Review 1818. 5 [2012] FCA 1200 (5 November 2012) (‘Bathurst’). 6 For example, the requirement not to engage in misleading or deceptive conduct under ss 1041E and 1041H of the Corporations Act 2001 (Cth) (‘Corporations Act’) and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’): see Bathurst [2012] FCA 1200 (5 November 2012).

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Part III reviews the current statutory framework of the credit rating industry in Australia, and identifies a number of shortcomings under the present structure. Part IV then outlines the bases of liability relied on by the aggrieved investors in Bathurst — completing the picture of laws and regulations currently applicable to CRAs in Australia. Part V presents the central proposition of this essay; namely, the introduction of a simplified statutory regime for aggrieved investors to sue a CRA that has failed to meet the basic standards of care, skill and diligence. This proposed reform is modelled on the statutory action against manufacturers for defective products, 7 taking advantage of the similarities between consumers suffering harm from defective manufactured products, and investors suffering harm from defective credit ratings. The proposed regime removes some of the procedural barriers existing in the current avenues of recourse against CRAs. It also recommends an ‘obligatory standards’ defence, relieving CRAs from liability to investors where they have met minimum standards of care, skill and diligence in the performance of their work. The overarching objectives of the suggested reform are twofold: firstly, to provide a clear incentive for CRAs to perform their work properly as expected by investors and the financial market at large; and secondly, where a CRA fails to do so, to ensure that the aggrieved investor has a realistic cause of action against that CRA. The viability of this reform option is underpinned by the fact that investors should be reasonably entitled to expect that CRAs will perform their job properly. Failing this, there should be consequences. Finally, the preceding themes will be summarised in Part VI.

II OVERVIEW OF THE CREDIT RATING INDUSTRY

A The Role of CRAs CRAs are primarily responsible for evaluating the credit risk of issuers (borrowers) of various financial products.8 They do so via the publication of ‘extremely standardized and condensed information about the creditworthiness of [financial products], distilled into an alphabetical

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!7 Competition and Consumer Act 2010 (Cth) sch 2 (‘Australian Consumer Law’) s 138. 8 Technical Committee of the IOSCO, ‘Report on the Activities of Credit Rating Agencies’ (Report, IOSCO, September 2003) 1; Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1, 3.

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symbol’.9 Credit ratings therefore summarise a great volume of complex information into an easily accessible form, allowing even the most unsophisticated investor to obtain the necessary information to conduct financial market transactions. The investing public is also able to gauge the market according to a uniform set of criteria, increasing the efficiency of financial markets overall (assuming credit ratings are accurate and reliable).10

Traditionally, CRAs were engaged to rate the credit risk of fixed-income securities or corporate bonds. 11 In more recent times, 12 a significant proportion of CRAs’ revenue has been generated by the rating of more complex products, including structured financial products such as residential mortgage-backed securities and collateralised debt obligations. 13 A joint report prepared by the Australian Treasury and Australian Securities and Investments Commission (‘ASIC’) noted that by 2007, up to 50 per cent of global CRAs’ revenue was derived from the rating of structured products.14 This marked shift introduced further difficulties regarding the CRAs’ role in financial markets, particularly given the complexity of structured finance transactions and the lack of historical performance data due to limited secondary markets.15 In addition, CRAs faced new conflicts of interest as a result of participating in the advisory aspects of ‘creating’ structured finance products.16

Nevertheless, the aim of CRAs’ operations remains the same: to alleviate the degree of information asymmetry that exists between the issuers of the !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!9 John C Coffee Jnr, Gatekeepers: the Professions and Corporate Governance (Oxford University Press, 2006) 284. 10 Ibid. 11 Frank Partnoy, ‘How and Why Credit Rating Agencies Are Not Like Other Financial Gatekeepers’ (Research Paper No 07-46, Legal Studies Research Paper Series, University of San Diego School of Law, May 2006) <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=900257>. The modern credit rating industry emerged in the late 1800s, where the predecessors to S&P and Moody’s analysed and classified railroad bonds: at 62–3. 12 For example, CRAs began to issue credit ratings for mortgage-backed securities from the 1970s: Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1, 5. 13 Ibid. 14 Australian Treasury and ASIC, ‘Review of Credit Rating Agencies and Research Houses: a Joint Report by the Treasury and the Australian Securities and Investments Commission’ (Report, Australian Treasury and ASIC, October 2008) 9 [29]. 15 Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1, 5–9. 16 See below Part II(B)(5).

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financial products and investors (lenders) by processing ‘the vast amount of information available regarding an issuer or borrower, its market and its economic circumstances in order to give investors and lenders a better understanding of the risks they face … when purchasing an issuer’s [financial product]’.17 The tangible output of that analysis is known as a credit rating — a CRA’s opinion as to the likelihood of timely repayment of financial obligations, either generally or specifically, by the issuer of the financial product.18

CRAs have been described as one of the major ‘gatekeepers’ to financial markets.19 According to Professor Coffee, a gatekeeper is an independent professional whose role is to prevent wrongdoing by ‘withholding necessary cooperation or consent’ to dubious financial transactions.20 CRAs restrict access to financial markets because the majority of investors consider credit ratings as a ‘benchmark’ or ‘certification’21 of the quality of the financial product. Without the CRA’s ‘seal of approval’,22 issuers of financial products would find it virtually impossible to attract investors in the highly competitive financial market. In addition, credit ratings feature in various domestic and international laws, regulations and supervisory frameworks — meaning that certain institutional investors are barred from making investments unless the product is assigned a particular credit rating by a ‘recognised’ CRA.23

B Criticisms of the Credit Rating Industry The modern credit rating industry has been plagued with numerous criticisms, particularly in recent times in light of the GFC. The Technical Committee of the IOSCO, an international body overseeing the world’s !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!17 Technical Committee of the IOSCO, ‘Report on the Activities of Credit Rating Agencies’ (Report, IOSCO, September 2003) 1. 18 Ibid 3; Australian Treasury and ASIC, above n 14, 6 [14]. 19 See, eg, Australian Treasury and ASIC, above n 14, 6 [16]; see generally Coffee, above n 9. 20 Coffee, above n 9, 2. 21 Theresa Nagy, ‘Credit Rating Agencies and the First Amendment: Applying Constitutional Journalistic Protections to Subprime Mortgage Litigation’ (2009) 94 Minnesota Law Review 140, 156. 22 Tin A Bunjevac, ‘Credit Rating Agencies: a Regulatory Challenge for Australia’ (2009) 33 Melbourne University Law Review 39, 45. 23 See below Part II(B)(2). In Australia, the notion of a ‘recognised’ CRA refers to those CRAs with Australian Financial Service licences; in the United States, this encompasses Nationally Recognized Statistical Ratings Organizations (NRSROs). Institutional investors are generally required to purchase ‘investment grade’ financial products; that is, financial products rated BBB and above.

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securities regulators, 24 argues that these problems are undermining the integrity of the credit rating industry.25 An overview of these criticisms will now be provided.

1 Quality of Credit Rating Process A first criticism of the credit rating industry relates to the quality of the credit rating process. Recent commentary and litigation have questioned whether ratings published by CRAs were reached as a result of adequate investigation and analysis, particularly given CRAs’ increased activity in rating more complex structured financial products.26

The value of a credit rating is said to depend on two things: clarity of meaning, and sufficiently thorough analysis of the data underlying the credit rating itself.27 Assuming the clarity of the current alphabetical grading system is not in dispute, the quality of the credit rating process itself becomes the sole focus.

As acknowledged previously, one of the key rationales behind credit ratings is to reduce the asymmetry of information between borrowers, lenders and other market participants.28 Therefore, a CRA properly conducting itself should assist investors in making more informed investment decisions.29 This will not occur when a CRA fails to undertake comprehensive analysis of the creditworthiness of the financial product. The implications for investors in these circumstances are significant. An inadequate credit rating process is likely to invoke in investors a ‘false sense of certainty’ as to the risks they face

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!24 IOSCO, The International Organization of Securities Commission (2013) <http://www.iosco.org/about/>. 25 See Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1. 26 See, eg, Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1; Bathurst [2012] FCA 1200 (5 November 2012). See also Frank Partnoy, ‘The Siskel and Ebert of Financial Markets? Two Thumbs Down for the Credit Rating Agencies’ (1999) 77(3) Washington University Law Quarterly 619, 653, where Partnoy emphasises this point: ‘How could credit rating agencies generate information of such enormous value in a competitive market, given their limited resources? Credit rating agencies do not independently verify information supplied to them by issuers. All rating agencies get the same data’ (citations omitted). 27 Technical Committee of the IOSCO, ‘Report on the Activities of Credit Rating Agencies’, above n 17, 16. 28 Ibid. 29 Ibid.

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when making particular investments. 30 As recognised by IOSCO, such a situation could make a market less, rather than more, transparent.31

The failure of a CRA to undertake proper analysis during the credit rating process occurred in Bathurst.32 In that case, the CRA received various models and data from the issuer without conducting independent verification as to the reliability of such information. In fact, it was held by the Court that a number of inputs into these models were plainly incorrect — for example, the model utilised a volatility input of 15 per cent, when in actual fact the volatility input that should have been used was almost double at 28–29 per cent.33 This failure to undertake basic due diligence during the credit rating process led to the CRA assigning an overly optimistic AAA rating and significant losses to investors relying upon the accuracy of those ratings.

2 Regulatory Reliance on Credit Ratings A second criticism of the credit rating industry relates to the ‘official recognition’ of credit ratings in various domestic and international laws and supervisory frameworks.34 Bunjevac offers a useful summary of the regulatory situation in Australia:

Australian institutions have had a long history of regulatory reliance on credit

ratings, not only at the local government level, but also at the level of general

public fiscal policy and prudential standards regulation. In addition to the

formal regulatory recognition of credit ratings in Australia, some authors have

also pointed to the soft-disciplining role that the CRAs have had on public

fiscal policy in general. For example, [one author] argued that the CRAs have

effectively assumed the management of some state governments’ public sector

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!30 This is especially the case in the shorter term. 31 Technical Committee of the IOSCO, ‘Report on the Activities of Credit Rating Agencies’, above n 17, 16. It is noted that a lack of diligence on the part of a CRA would likely lead to business failure of that CRA in the longer term, and therefore poses less of a problem to investors. 32 For a summary of the facts and bases of liability discussed in Bathurst [2012] FCA 1200 (5 November 2012), see below Part IV. 33 Bathurst [2012] FCA 1200 (5 November 2012) 1081–2 [2614]. According to Jagot J, ‘no reasonably competent ratings agency could have considered any analysis on the basis of a volatility of 15% a proper or reasonable foundation upon which to rate the CPDO’: at 1102 [2669]. 34 See Australian Treasury and ASIC, above n 14, 20 [85].

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processes because they dictate the manner in which those governments can raise funds from the world financial markets.35

For example, Victorian local government investment policies provide that councils should have regard to credit ratings in the development of approved lists for short and long-term debt issues.36

The result of such regulatory reliance is that credit ratings have effectively gained the status of ‘indispensability’ in financial markets.37 This status has undesirable consequences. The practice has been described as ‘methodologically unsound and inherently anti-competitive because it favours the well-established firms and hinders competition’.38 Regulatory reliance on credit ratings also implies that credit ratings are necessarily reliable and credible.39 Of course, this may not always be the case.

Partnoy is particularly critical of the degree of regulatory reliance on credit ratings. He asserts that the current regime has resulted in the creation of ‘regulatory licences’, which are the ‘valuable property rights associated with the ability of a private entity, rather than the regulator, to determine the substantive effect of legal rules’. 40 Regulatory licences are considered detrimental as they incentivise CRAs to provide inaccurate ratings. This is because issuers are paying for the regulatory entitlements rather than the informational content of credit ratings.41 The regulatory licence view of credit ratings therefore helps us to understand why the notion of reputational capital42 no longer suffices to discipline the credit rating market: instead of

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!35 Bunjevac, above n 22, 46–7; but cf the view of the Australian Treasury and ASIC, who suggest that ‘ASIC has not relied heavily on recognition of CRAs in its regulatory policy’: ibid 20 [86]. 36 Bunjevac, above n 22, n 44, citing Martin Gold, ‘Financial Sustainability and the Imperative for Reform in Investment Organisation in Australia’s Local Government Sector’ (2008) 14(1) Accounting, Accountability & Performance 35, 47, 56. 37 Geneviève Brunner, ‘Credit Rating Agencies: Time to Act’ (2009) 27 Company and Securities Law Journal 125, 127. 38 Bunjevac, above n 22, 47; see also Partnoy, ‘How and Why Credit Rating Agencies Are Not Like Other Financial Gatekeepers’, above n 11, 90–1; Coffee, above n 9, 1, 17. Part II(B)(4) elaborates on the problem of limited competition within the credit rating industry. 39 Bunjevac, above n 22, 48, quoting Catherine Lubochinsky and Olivier Raingeard, Submission to the European Commission, Consultation on Policy Proposals regarding Credit Rating Agencies, 5 September 2008, 10. 40 Frank Partnoy, ‘The Siskel and Ebert of Financial Markets? Two Thumbs Down for the Credit Rating Agencies’ (1999) 77(3) Washington University Law Quarterly 619, 623. 41 Ibid 624. 42 See below Part II(B)(4).

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the CRAs’ reputations in the market being important, it is the CRAs’ reputations with the regulators that reigns supreme.43

3 Lack of Market Transparency A third criticism of the credit rating industry relates to the perceived lack of disclosure and transparency of CRAs’ procedures, methodologies and assumptions.44 Although some level of disclosure to the market does exist,45 the particular problem concerns the form of disclosure. At present, opponents maintain that it is extremely difficult to verify and readily compare the information and techniques utilised by CRAs in the credit rating process.46 The material currently disclosed by CRAs is often presented in complex specialised terms, such that only investors with particular expertise are able to fully understand and evaluate the impact of such information. The impact of assumptions and historical performance statistics, along with the overarching complexity of rating new and innovative structured financial products, further contribute to this problem.47

The contrary argument is that despite some degree of disclosure by CRAs, investors have been all too quick to accept CRAs’ analyses and conclusions without conducting their own independent investigations. In other words, this view questions the value of mandating increased disclosure by CRAs where investors are not properly utilising the existing available information. 48 However, while this argument has some merit, it is contended that further and clearer disclosure would encourage investors to turn their minds to the function of CRAs — an outcome that is plainly desirable in order to reduce the incidence of flawed credit ratings. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!43 See Partnoy, ‘The Siskel and Ebert of Financial Markets’, above n 40, 684. 44 See Treasury and ASIC, above n 14, 18–19 [72]–[79]. 45 For example, the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies promotes ‘Transparency and Timeliness of Ratings Disclosure’: see Technical Committee of the IOSCO, IOSCO Code of Conduct Fundamentals for Credit Rating Agencies (2004) 8–9 [3] <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD180.pdf> (‘IOSCO Code Fundamentals’). 46 Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1, 10. 47 Ibid. 48 The alternative view is that investors should not be expected to make significant further inquiries at all — the whole point of engaging a expert CRA is for the individual investor to ‘delegate’ the role to someone who is better qualified to do the job. If the investor were expected to review the credit rating process as well, this would effectively nullify the CRA’s role.

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4 Lack of Competition A fourth criticism of the credit rating industry relates to the concentration of CRAs within the credit rating market. Despite the fact that there are approximately 130–150 CRAs in existence around the world, only a handful of these are considered to be truly competitive in the global financial market.49 Numerous commentators recognise a ‘Big Three’ comprising Standard & Poor’s Ratings Services (‘S&P’), Moody’s Investors Service (‘Moody’s’) and Fitch Ratings (‘Fitch’),50 whose combined control is estimated to comprise over 98 per cent of the credit rating market.51 A significant portion of this market share is dominated by the duopoly of S&P and Moody’s.52 These statistics make it clear that the major CRAs enjoy unparalleled command of their market. But such dominance comes at a price, and it is investors who are incurring these costs.

The notion of ‘reputational capital’ is relevant here. Reputational capital asserts that the ‘reputation of a business operates as a market-based mechanism for ensuring the highest standards of quality’.53 Although this doctrine has been discredited in recent times,54 the demand for CRAs to build and preserve a strong reputation for being a trusted gatekeeper remains. Since ‘reputational capital cannot be acquired overnight’,55 it is virtually impossible for new CRAs to enter the market. Indeed, issuers tend to retain, and investors are more inclined to trust, the ratings of CRAs used by government

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!49 Mia Mahmudur Rahim, ‘Credit Rating Agencies’ Roles Have to Be Reassessed’ (2010) 4 Law and Financial Markets Review 433, 434. 50 Nan S Ellis, Lisa M Fairchild and Frank D’Souza, ‘Is Imposing Liability on Credit Rating Agencies a Good Idea? Credit Rating Agency Reform in the Aftermath of the Global Financial Crisis’ (2012) 17 Stanford Journal of Law, Business and Finance 175, n 21, 201. 51 Ibid; see also Aline Darbellay and Frank Partnoy, ‘Credit Rating Agencies under the Dodd-Frank Act’ (2011) 30(12) Banking and Financial Services Policy Report 1, 2, citing Gary Shorter and Michael V Seitzinger, ‘Credit Rating Agencies and Their Regulation’ (CRS Report for Congress No R40613, Congressional Research Service, United States Congress, 2009) 3. An earlier estimate in March 2008 suggests a slightly lower figure of 85 per cent: Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1, 14. 52 Coffee, above n 9, 284. Fitch has expertise in specialised markets. 53 Bunjevac, above n 22, 50. 54 It has been suggested that reputational capital no longer suffices as a natural regulator of CRAs, given their recent failures to meet basic standards of care, skill and diligence: ibid; Partnoy, ‘The Siskel and Ebert of Financial Markets’, above n 40, 619. 55 Coffee, above n 9, 284; see also Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1, 13.

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regulators and agencies.56 What’s more, this scenario is circular: without market endorsement, a new CRA cannot truly compete; but governments are unlikely to engage the services of newer CRAs given their lack of accumulated reputational capital.57

This lack of sufficient competition has consequences for the level of discipline in the credit rating market. Since there are effectively only two or three competitors of any significance, these CRAs may be more inclined to ‘shirk’ responsibility and effort when assessing and publishing credit ratings than if strong market competition disciplines were in place. 58 This has been exemplified through CRAs’ delayed response to downgrade ratings in a number of cases (rather than fulfilling their true role as proactive market signallers).59 This absence of significant rivalry also helps to explain the failure of CRAs to meet basic standards of care, skill and diligence in the performance of their work.60 For these reasons, a more competitive credit rating market is likely to result in the publication of more attentive and accurate credit ratings.61

A concern related to the lack of market competition is the prevalence of unsolicited ratings. ‘Unsolicited ratings’ refer to the ratings of CRAs that are generated without any formal engagement by the issuer.62 Unsolicited ratings are problematic for two reasons. Firstly, given the lack of participation by the issuer, unsolicited ratings may not provide fully informed representations of the issuer’s creditworthiness (for example, where the CRA was not made aware of material non-public information).63 Secondly, some authors have

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!56 Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1, 13. 57 Ibid; Ryan Voorhees, ‘Rating the Raters: Restoring Confidence and Accountability in Credit Rating Agencies’ (2012) 44 Case Western Reserve Journal of International Law 875, 883; Brunner, above n 37, 126–7; Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1, 14. 58 Coffee, above n 9, 285. 59 Ibid. WorldCom and Enron are two recent examples where CRAs failed to downgrade credit ratings in a timely manner, ultimately contributing to WorldCom and Enron’s business failures. 60 See, eg, Bathurst [2012] FCA 1200 (5 November 2012). 61 But see Bo Becker and Todd Milbourn, ‘How Did Increased Competition Affect Credit Ratings?’ (2011) 101 Journal of Financial Economics 493. 62 Technical Committee of the IOSCO, ‘Report on the Activities of Credit Rating Agencies’, above n 17, 15. 63 Ibid.

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suggested that CRAs that produce unsolicited ratings may have engaged in abusive practices.64 By devising a credit rating before initiating contact with the issuer, the CRA may bill the issuer for publication of the rating, or perhaps imply that the unsolicited rating could be upgraded in exchange for formal engagement and cooperation with the CRA.65 The existence of unsolicited ratings distorts the accuracy of credit ratings available in the market, and should be discouraged.66

5 Conflicts of Interest A fifth criticism of the credit rating industry relates to the inherent conflicts of interest fuelled by an ‘issuer-pays’ system, as well as by the provision of advisory services that may be offered by CRAs.67 Under an issuer-pays system, it is the issuer who engages and ultimately pays the CRA for its credit rating services.68 While this arrangement is not uncommon in professional service industries generally, the issuer-pays system does open the door for CRAs to downplay credit risk (that is, inflate the credit rating) in order to retain that issuer’s business.69 Of course, where a CRA engages in such disingenuous conduct, credit ratings will exaggerate credit quality, and thus distort the overall accuracy of credit ratings in the market.

Further, the growing volume of structured finance transactions and corresponding ratings business presents CRAs with new and increasingly

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!64 Ibid. 65 Ibid. 66 But it is noted that given the high barriers to entry, new CRAs often rely on unsolicited ratings in order to build their reputations. Total prohibition of unsolicited ratings may have the effect of closing the market altogether, which would not be beneficial: see above Part II(B)(4). IOSCO suggests that the preferred way to deal with the existence of unsolicited ratings is through clear disclosure: ibid 15. 67 See Coffee, above n 9, 286–7; Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1, 12–13; Ryan Voorhees, ‘Rating the Raters: Restoring Confidence and Accountability in Credit Rating Agencies’ (2012) 44 Case Western Reserve Journal of International Law 875, 878–80; D Andrew Hatchett, ‘Sox It to ‘Em: Using Sarbanes-Oxley as a Model for Regulating Conflicts of Interest in the Credit Rating Industry’ (2012) 63 Alabama Law Review 407, 413–14. 68 The alternative is a subscriber-pays system: see Partnoy, ‘The Siskel and Ebert of Financial Markets’, above n 40, 640. The benefits of an issuer-pays system include improved market efficiency and elimination of the free-rider problem inherent in subscriber-pays systems: at 653, 683. 69 Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1, 12; see also D Andrew Hatchett, ‘Sox It to ‘Em: Using Sarbanes-Oxley as a Model for Regulating Conflicts of Interest in the Credit Rating Industry’ (2012) 63 Alabama Law Review 407, 413–14.

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compelling conflicts. The expansion of the structured finance market in recent years has resulted in structured finance ratings being one of the fastest growing income sources for the major CRAs. 70 In order to ‘maintain transaction flow’, CRAs may be tempted to relax rating methodologies and assumptions.71

The popularity of structured financial products has also enabled CRAs to expand their business operations. Equipped with highly specialised ratings expertise, CRAs are able to advise on how to structure a financial product to achieve the desired credit rating. In fact, CRAs have done just that.72 But CRAs’ encroachment into unconventional fee-earning activities is cause for concern. Where CRAs are retained for this dual function, serious questions are raised about the independence and integrity of the credit rating itself: without adequate operational and legal separation of the credit rating and ancillary business practices, the presence of conflicts is likely to impair the reliability of credit ratings.73

As indicated previously, these conflicts are not unique to CRAs; they affect the majority of professional service providers in modern times.74 But despite the fact that fiduciary duties of other financial gatekeepers have been statutorily recognised in Australia, 75 CRAs have been largely ignored. Although an examination of potential remedies to this situation is beyond the scope of this

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!70 Technical Committee of the IOSCO, ‘The Role of Credit Rating Agencies in Structured Finance Markets’, above n 1, 13. 71 Ibid. 72 The process of ‘creating’ structured financial products has allowed CRAs to participate in an effectively reverse role, where the issuer informs the CRA what their desired credit rating is, and the CRA advises the issuer as to how to structure the product in order to attain that rating. This increased level of participation by CRAs is yet another example of the increased conflicts of interest faced by modern CRAs: ibid; D Andrew Hatchett, ‘Sox It to ‘Em: Using Sarbanes-Oxley as a Model for Regulating Conflicts of Interest in the Credit Rating Industry’ (2012) 63 Alabama Law Review 407, 415. 73 Operational and legal separation of a CRA’s credit rating business from its other businesses is encouraged in the IOSCO Code Fundamentals: see Technical Committee of the IOSCO, IOSCO Code Fundamentals (2004) 4 [2.5] <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD180.pdf>. 74 See generally Coffee, above n 9. 75 See, eg, Corporations Act s 961B.

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essay, it is clear that the present regime does not adequately deal with the conflicts of interest that plague the credit rating industry.76

III STATUTORY REGULATION OF CRAS IN AUSTRALIA

A Summary of Current Regulation Since 1 January 2010,77 CRAs operating in Australia have been required to hold an Australian Financial Services (‘AFS’) licence on the basis that they are providers of ‘general financial product advice’.78 An AFS licence authorises licensees to conduct a financial services business, and enables licensees to undertake activities such as providing financial product advice to clients.79 These provisions typically apply to financial advisers, such as financial planners, for unsophisticated ‘mum and dad’ investors. ASIC is charged with the responsibility of assessing applications for AFS licences.80 When applying for an AFS licence, the applicant must demonstrate its ability to meet the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!76 For further discussion on conflicts of interest in the credit rating industry, see D Andrew Hatchett, ‘Sox It to ‘Em: Using Sarbanes-Oxley as a Model for Regulating Conflicts of Interest in the Credit Rating Industry’ (2012) 63 Alabama Law Review 407. 77 ASIC, ‘ASIC Outlines Improvements to Regulation of Credit Rating Agencies in Australia’ (Media Release, 09-244MR, 12 November 2009) <http://www.asic.gov.au/asic/asic.nsf/byheadline/09-224MR-ASIC-outlines+-improvements-to-regulation-of-credit-rating-agencies-in-Australia?openDocument>; see also Nick Sherry, ‘Improved Australian Controls for Credit Rating Agencies and Research Houses’ (Media Release, No 077, 13 November 2008) <http://minscl.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/077.htm&pageID=&min=njs&Year=2008&DocType=0>; Australian Treasury and ASIC, above n 14; Technical Committee of the IOSCO, ‘Regulatory Implementation of the Statement of Principles Regarding the Activities of Credit Rating Agencies’ (Consultation Report, IOSCO, May 2010) 11. Prior to this change, eligible CRAs were not required to hold an AFS licence, subject to compliance with provision 4.1 of the IOSCO Code Fundamentals: ASIC, ASIC Class Order — Credit Rating Agencies, CO 05/1230, 15 December 2005; ASIC, ASIC Class Order — Credit Rating Agencies, CO 03/1093, 22 December 2003; see also ASIC, ‘Licensing: Credit Rating Agencies’ (Consultation Paper No 65, ASIC, June 2005) 3 [8]. 78 ‘Financial product advice’ is defined as ‘a recommendation or statement of opinion, or a report of either of those things, that … is intended to influence a person or persons in making a decision in relation to a financial product or class of financial products, or an interest in a particular financial product or class of financial products; or … could reasonably be regarded as being intended to have such an influence’: Corporations Act s 766B(1); ‘general advice’ is defined as ‘financial product advice that is not personal advice’: Corporations Act s 766B(4); see also Australian Treasury and ASIC, above n 14, 13 [50]. 79 ASIC, ‘ASIC Outlines Improvements to Regulation of Credit Rating Agencies in Australia’ (Media Release, 09-244MR, 12 November 2009) <http://www.asic.gov.au/asic/asic.nsf/byheadline/09-224MR-ASIC-outlines+-improvements-to-regulation-of-credit-rating-agencies-in-Australia?openDocument>. 80 Ibid.

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obligations associated with holding an AFS licence,81 including the general obligations under s 912A of the Corporations Act.82

CRAs are also subject to a number of additional licence conditions. 83 Specifically, eight tailored conditions attach to AFS licences granted to CRAs.84 These tailored licence conditions require CRAs to:

1. comply with the provisions of the IOSCO Code Fundamentals;

2. annually lodge with ASIC an IOSCO Code Annual Compliance Report (‘IOSCO Compliance Report’);

3. disclose procedures, methodologies and assumptions for ratings;

4. have in place arrangements to monitor and regularly review credit ratings;

5. review ratings affected by material changes to rating methodologies within six months of the change;

6. have in place externally approved training programs for credit analysts;

7. refrain from ‘notching’ credit ratings for an anti-competitive purpose; and

8. consent to information sharing between ASIC and foreign regulators.

While most of these tailored licence conditions are relatively self-explanatory, the first and second tailored licence conditions warrant further explanation.

The first condition gives legislative status to the IOSCO Code Fundamentals, a series of robust, practical measures aimed at achieving the fair, efficient and transparent operation of CRAs in global financial markets.85 The measures are

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!81 Ibid. 82 See below nn 112–114. 83 ASIC, Credit Rating Agencies: Guidance on Certain Licence Conditions (Information Sheet No 143, ASIC, 13 April 2012) <https://www.asic.gov.au/asic/asic.nsf/byheadline/Credit+rating+agencies+Guidance+on+certain+AFS+licence+conditions?openDocument>. 84 ASIC, ‘ASIC Outlines Improvements to Regulation of Credit Rating Agencies in Australia’ (Media Release, 09-244MR, 12 November 2009) <http://www.asic.gov.au/asic/asic.nsf/byheadline/09-224MR-ASIC-outlines+-improvements-to-regulation-of-credit-rating-agencies-in-Australia?openDocument>. 85 The IOSCO Code Fundamentals was published subsequent to the IOSCO Statement of Principles Regarding the Activities of Credit Rating Agencies, an articulation of high-level objectives to guide the fair and efficient operation of CRAs around the world: Technical Committee of the IOSCO, Statement of Principles Regarding the Activities of Credit Rating Agencies (2003) <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD151.pdf> (‘IOSCO

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also designed to protect investors, minimise systematic risk, and provide a model code of conduct for CRAs around the world.86 According to ASIC, the most relevant provisions of the IOSCO Code Fundamentals to achieve compliance with this licence condition are:

• the separation of credit rating services from advisory or consulting services;87

• the application of rigorous, systematic and historically validated rating

methodologies;88

• the timely and effective disclosure of actual and potential conflicts of interest;89

• the periodic review of rating methodologies and models;90 and

• the timely review and disclosure of affected ratings following material changes to ratings methodologies or assumptions.91

The second condition requires CRAs to submit an IOSCO Compliance Report to ASIC on at least an annual basis,92 describing in detail how they have

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Statement of Principles’). The IOSCO Code Fundamentals builds on the IOSCO Statement of Principles by offering a more specific and detailed guide as to how the IOSCO Statement of Principles should be implemented in practice: see generally Technical Committee of the IOSCO, IOSCO Code Fundamentals (2004) 1–3 <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD180.pdf>. 86 Technical Committee of the IOSCO, IOSCO Code Fundamentals, above n 85, 1. 87 Ibid 6 [2.5]; ASIC, Credit Rating Agencies: Guidance on Certain Licence Conditions (Information Sheet No 143, ASIC, 13 April 2012) <https://www.asic.gov.au/asic/asic.nsf/byheadline/Credit+rating+agencies+Guidance+on+certain+AFS+licence+conditions?openDocument>. 88 Technical Committee of the IOSCO, IOSCO Code Fundamentals, above n 87, 4 [1.2–1.3]; ASIC, Credit Rating Agencies: Guidance on Certain Licence Conditions (Information Sheet No 143, ASIC, 13 April 2012) <https://www.asic.gov.au/asic/asic.nsf/byheadline/Credit+rating+agencies+Guidance+on+certain+AFS+licence+conditions?openDocument>. 89 Technical Committee of the IOSCO, IOSCO Code Fundamentals, above n 88, 7 [2.7]; ASIC, Credit Rating Agencies: Guidance on Certain Licence Conditions (Information Sheet No 143, ASIC, 13 April 2012) <https://www.asic.gov.au/asic/asic.nsf/byheadline/Credit+rating+agencies+Guidance+on+certain+AFS+licence+conditions?openDocument>. 90 Technical Committee of the IOSCO, IOSCO Conduct Fundamentals, above n 89, 4 [1.2]; ASIC, Credit Rating Agencies: Guidance on Certain Licence Conditions (Information Sheet No 143, ASIC, 13 April 2012) <https://www.asic.gov.au/asic/asic.nsf/byheadline/Credit+rating+agencies+Guidance+on+certain+AFS+licence+conditions?openDocument>. 91 ASIC, Credit Rating Agencies: Guidance on Certain Licence Conditions (Information Sheet No 143, ASIC, 13 April 2012) <https://www.asic.gov.au/asic/asic.nsf/byheadline/Credit+rating+agencies+Guidance+on+certain+AFS+licence+conditions?openDocument>.

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complied with the IOSCO Code Fundamentals.93 The submission of IOSCO Compliance Reports intends to instil in ASIC a sense of ‘comfort’ that a CRA is sufficiently prepared to meet its obligations under the IOSCO Code Fundamentals,94 as well as to assist ASIC with ‘independent assessment of CRA compliance with obligations concerning quality and integrity of their rating processes, conflicts of interest and their responsibilities to the investing public and issuers’.95

B Limitations of Current Regulation Despite the enhanced regulation of the credit rating industry, there remains scope for further intervention. As stated by ASIC, its oversight function is not particularly effective (if at all): ‘We have no power to interfere with the content of credit rating methodologies or credit ratings’.96 Although ASIC may be able to take some action in the case of problematic ratings, such as if an investor considers a rating to be misleading or deceptive,97 ASIC’s overall power to discipline CRAs are, in practice, negligible. This should not be the case where a CRA has clearly failed to meet reasonable standards.

Two specific limitations of the current regulatory framework will be explored in further detail below; namely, the consequences of a CRA failing to submit to ASIC an IOSCO Compliance Report, and the limitations of the market misconduct provisions under the Corporations Act in their application to CRAs.

1 Failure to Submit IOSCO Compliance Report

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!92 ASIC, ‘Credit Rating Agencies: Lodging a Compliance Report with ASIC’ (Information Sheet No 147, ASIC, December 2011); see also ASIC, ‘Credit Rating Agencies: IOSCO Code Annual Compliance Report’ (Consultation Paper No 160, ASIC, June 2011) 7 [5(b)]. 93 Nick Sherry, ‘Improved Australian Controls for Credit Rating Agencies and Research Houses’ (Media Release, No 077, 13 November 2008) <http://minscl.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/077.htm&pageID=&min=njs&Year=2008&DocType=0>; ASIC, ‘Credit Rating Agencies: IOSCO Code Annual Compliance Report’ (Consultation Paper No 160, ASIC, June 2011). 94 ASIC, ‘Credit Rating Agencies: IOSCO Code Annual Compliance Report’ (Consultation Paper No 160, ASIC, June 2011) 12 [15]. 95 Ibid 13 [19]. 96 Ibid 7 [6]. 97 Ibid 7 n 5.

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Failure to submit an IOSCO Compliance Report constitutes a breach of an AFS licence condition. 98 The implications of breaching an AFS licence condition depend on whether the breach is ‘significant’ or ‘not significant’.99 Under s 912D(1) and (1B) of the Corporations Act, only ‘significant’ (or likely ‘significant’) breaches need to be reported to ASIC.100 The term ‘significant’ is not defined in the Corporations Act.101 In determining whether a breach is ‘significant’, the AFS licensee must consider the factors in s 912D(1)(b) of the Corporations Act.102 Further assistance as to the classification of ‘significant’ and ‘not significant’ breaches is provided by ASIC.103

It is unclear whether a failure to submit an IOSCO Compliance Report would be considered a ‘significant’ breach. The guiding factors in s 912D(1)(b) and examples provided by ASIC relate more closely to the degree of the breach, as opposed to the subject matter of the breach.104 But regardless of whether the breach is classified as ‘significant’ or ‘not significant’, the current procedures do not adequately deal with a CRA’s failure to submit an IOSCO Compliance Report. If the breach was ‘significant’, it does not make sense to require CRAs to inform ASIC that they have not submitted an IOSCO Compliance Report to ASIC, especially if that failure to submit was intentional. On the other hand, if the breach was ‘not significant’, the defaulting CRA would not be required to notify ASIC of this breach, and it appears that ASIC would be unable to take

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!98 Corporations Act s 912A(1)(b); see also ASIC, Regulatory Guide 78: Breach Reporting for AFS Licensees (2008). ASIC also has the power to suspend or cancel the AFS licence where the CRA has not complied with their obligations under s 912A, but note that the obligation to submit a Compliance Report is not an obligation under s 912A: Corporations Act s 915C. 99 Corporations Act s 912D; ASIC, above n 98, 5 [78.4]–[78.5]. 100 See also ASIC, above n 99, 5 [78.4]. ‘Not significant’ breaches do not attract serious consequences; the AFS licensee is expected to address or rectify the breach in some other way, however ASIC does not appear to have any power to enforce this. 101 Ibid 7. 102 Corporations Act s 912D(1B); see also ASIC, above n 101, 7 [78.13]. The factors in s 912D(1)(b) are: ‘(i) the number or frequency of similar previous breaches; (ii) the impact of the breach or likely breach on the licensee’s ability to provide the financial services covered by the licence; (iii) the extent to which the breach or likely breach indicates that the licensee’s arrangements to ensure compliance with those obligations is inadequate; (iv) the actual or potential financial loss to clients of the licensee, or the licensee itself, arising from the breach or likely breach; (v) any other matters prescribed by regulations made for the purposes of this paragraph’. 103 See ASIC, above n 102, 9–11 [78.15]–[78.16], which provides examples of breaches relevant to other types of financial product advisers, such as financial planners; for example, the failure to maintain professional indemnity insurance or the provision of inappropriate advice to a client. 104 Regulatory Guide 78: Breach Reporting for AFS Licensees was published in September 2008, prior to the introduction of the requirement for CRAs to hold AFS licences: ibid.

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any action at all.105 This outcome clearly fails to address the underlying objectives of the CRA licensing reform. Evidently, the current breach reporting procedures are not suited to address the consequences of a CRA’s failure to submit an IOSCO Compliance Report.

2 Effect of Market Misconduct Provisions under the Corporations Act

Further, many of the safeguards against market misconduct in ch 7 of the Corporations Act relating to AFS licensees do not apply to CRAs. Even though CRAs are considered to be providers of ‘financial product advice’ under s 766B(1),106 credit ratings are considered to be ‘general advice’ rather than ‘personal advice’ under the Corporations Act.107 As such, CRAs are not bound by any ‘reasonable measures’ requirements,108 including acting in the best interests of the client109 or warning the client that their advice is based on incomplete or inaccurate information.110 Yet, such obligations unquestionably influence the work of CRAs. It is incongruent that CRAs are able to elude such restrictions under the current regulatory regime.111

In addition, CRAs (as AFS licensees) are bound by a number of general obligations under s 912A of the Corporations Act. These include ‘[doing] all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly’; 112 taking steps to ensure

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!105 See above n 96. 106 See above n 78. 107 ‘Personal advice’ is defined as ‘financial product advice that is given or directed to a person (including by electronic means) in circumstances where: (a) the provider of the advice has considered one or more of the person’s objectives, financial situation and needs … or (b) a reasonable person might expect the provider to have considered one or more of those matters: Corporations Act s 766B(3); see above n 78 for the definition of ‘general advice’. 108 Australian Treasury and ASIC, above n 14, 16 [62]. 109 Corporations Act s 961B. 110 Corporations Act s 961H. 111 But see Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Market Ltd (2008) 73 NSWLR 653 (‘Ingot’), where an investment bank was held indirectly liable to a ‘passive’ third party plaintiff in relation to misleading due diligence sign-off procedures. A plaintiff is a ‘passive’ third party where they do not form part of the causal chain: at 659–60 [12]. Reliance on the misleading conduct need not be established, as the ‘very nature’ of the misleading conduct is said to have caused the loss. The indirect liability principle enunciated in Ingot was upheld in Bathurst [2012] FCA 1200 (5 November 2012) 1184–5 [2880]–[2881]. Nevertheless, the need to recognise CRA liability within a specific statutory regime is paramount: see below Part V. 112 Corporations Act s 912A(1)(a); see also Australian Treasury and ASIC, above n 14, 16 [62].

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compliance with relevant financial services laws;113 and ‘[maintaining] the competence to provide those financial services’. 114 Nevertheless, these obligations are only general: they are not specifically designed to address the shortcomings of faulty credit rating processes. The implicit obligation on CRAs that ratings be prepared by skilled representatives on reasonable grounds and not be misleading115 is not sufficient: an explicit recognition of these obligations should be included in the statutory regime for regulation of CRAs.

IV CURRENT TREATMENT OF FLAWED CREDIT RATINGS

A The Decision in Bathurst: Bases of Liability Bathurst represents Australia’s recent consideration of how flawed credit ratings should be dealt with under the current regulatory framework. As will be seen, Bathurst significantly modified the legal understanding of the standards required of CRAs, and the liabilities for breach (most notably, by recognising a duty of care between a CRA and potential investors). The first instance decision offers a useful foundation for establishing the minimum standards to be met by CRAs. These principles will assist in shaping the statutory regime proposed in Part V below.

As a starting point, it is helpful to briefly outline the roles of the key parties and events that ultimately led to court proceedings.

• Issuer: ABN AMRO Bank NV (‘ABN Amro’) created and issued the financial

product in this case — the constant proportion debt obligation (‘CPDO’).116

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!113 Corporations Act s 912A(1)(c), (ca); see also Australian Treasury and ASIC, above n 14, 16 [62]. 114 Corporations Act s 912A(1)(e); see also Australian Treasury and ASIC, above n 14, 16 [62]. 115 Australian Treasury and ASIC, above n 14, 16 [63]. 116 Bathurst [2012] FCA 1200 (5 November 2012) 23 [1]. Briefly, ‘[a] CPDO is a dynamically leveraged credit trading strategy which aims at generating high coupon payments … by selling default protection on a portfolio of investment-grade obligors with low default probabilities. The idea is to achieve this objective by dynamically adjusting a leveraged exposure to a credit index’: Rama Cont and Cathrine Jessen, ‘Constant Proportion Debt Obligations (CPDOs): Modeling and Risk Analysis’ (Financial Engineering Report No 2009-01, Center for Financial Engineering, Columbia University, 2 April 2009) 5 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1372414>.

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Two series of CPDOs were marketed in Australia as Rembrandt 2006–2 and Rembrandt 2006–3 (together, ‘Rembrandt Notes’).117

• CRA: S&P was the CRA retained by ABN Amro to rate the CPDO.118

• Initial investor: Local Government Financial Services Pty Ltd (‘LGFS’) was the

initial purchaser of the Rembrandt Notes in Bathurst. 119 It retained

approximately $26 000 000 of the Rembrandt 2006–3 products in its

portfolio.120

• Subsequent investors: 13 local councils in New South Wales — including

Bathurst Regional Council — as well as local council workers’ compensation

insurer StateCover Mutual Limited (‘StateCover’) each purchased a

proportion of the Rembrandt Notes from LGFS (the councils purchased the

Rembrandt 2006–3 products, while StateCover purchased the Rembrandt 2006–2 products).121

In October 2008, the Rembrandt Notes cashed out in accordance with the terms of the instruments creating the products.122 After various deductions were made, the investors received approximately six per cent of the principal amount paid for the financial products.123 The events caused StateCover to incur an alleged loss of $9 244 000, and the councils to incur alleged losses totalling nearly $16 000 000.124

StateCover and the councils commenced proceedings against LGFS, S&P and ABN Amro in respect of these losses.125 Although StateCover settled its claims prior to court proceedings, the claims of the councils against LGFS, S&P and ABN Amro remained outstanding and comprised the central dispute in Bathurst.126 LGFS also made claims against S&P and ABN Amro.127

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!117 Ibid. 118 Ibid. 119 Ibid 23 [2]. 120 Ibid. 121 Ibid. 122 Ibid 23 [3]. Where the CPDOs’ ‘net asset value fell below 10 per cent of the par price for which they had been acquired … the terms of the instruments creating the [CPDOs] provided for them to cash out in that event’. 123 Ibid. 124 Ibid. 125 Ibid 24 [4]. 126 Ibid 24 [5]. 127 Ibid 25 [13]–[14].

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Leaving aside the councils’ claims against LGFS and ABN Amro, and LGFS’s claim against ABN Amro, the councils and LGFS relied on two broad causes of action in their claims against S&P. Firstly, it was asserted that S&P had engaged in misleading and deceptive conduct through the issue of erroneous credit ratings.128 Secondly, it was asserted that S&P had failed to meet its common law duty of care in conducting its credit rating activities.129 These bases of liability will now be examined in turn.

1 Misleading and Deceptive Conduct The first broad cause of action brought by the councils and LGFS against S&P concerned the contravention of statutory provisions outlawing misleading and deceptive conduct. The Court considered three separate statutory provisions.130

Firstly, the councils and LGFS relied on s 1041E(1) of the Corporations Act (‘s 1041E claim’), which prohibits materially false and misleading statements and information from being made or disseminated:

A person must not (whether in this jurisdiction or elsewhere) make a

statement, or disseminate information, if:

(a) the statement or information is false in a material particular or is materially misleading; and

(b) the statement or information is likely:

(i) to induce persons in this jurisdiction to apply for financial products; or

(ii) to induce persons in this jurisdiction to dispose of or acquire financial products; or

(iii) to have the effect of increasing, reducing, maintaining

or stabilising the price for trading in financial products on a financial market operated in this jurisdiction; and

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!128 Ibid 25 [11]. 129 Ibid. 130 Ibid 1220 [2977]. As noted by Jagot J, the councils and LGFS had equivalent claims against S&P: ‘[t]here is no material difference in the position of S&P in respect of LGFS’s claims as compared to S&P’s position in respect of the councils’ claims’: at 1220 [2978].

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(c) when the person makes the statement, or disseminates the information:

(i) the person does not care whether the statement or information is true or false; or

(ii) the person knows, or ought reasonably to have known,

that the statement or information is false in a material particular or is materially misleading.

Secondly, the councils and LGFS relied on s 1041H(1) of the Corporations Act (‘s 1041H claim’), a wider provision concerning misleading and deceptive conduct in relation to financial products and services generally:

A person must not, in this jurisdiction, engage in conduct, in relation to a

financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.

Thirdly, the councils and LGFS relied on s 12DA(1) of the ASIC Act (‘s 12DA claim’), which restricts misleading or deceptive conduct in relation to financial services (but not financial products):

A person must not, in trade or commerce, engage in conduct in relation to

financial services that is misleading or deceptive or is likely to mislead or deceive (emphasis added).

In assigning and publishing the AAA rating to the Rembrandt Notes, Jagot J was satisfied that S&P made three distinct representations:

• that S&P, on reasonable grounds, was of the opinion that the capacity of the Rembrandt Note to meet its obligations was ‘extremely strong’;

• that S&P exercised reasonable care and skill in arriving at its opinion; and

• that S&P’s opinion could be safely relied upon.131

Jagot J found that these representations were false, thereby constituting misleading and deceptive conduct under the three statutory provisions outlined above.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!131 Ibid 1009–10 [2416], 1200 [2919], 1220 [2977].

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In relation to the s 1041E claim, Jagot J held that the fact that S&P itself formed part of the definition of the relevant statement and information was crucial — in other words, ‘[t]he statement and information was, in truth, that S&P, an expert ratings agency, had applied its expertise and rated this product AAA’.132 The view that the statement and information was simply ‘this product is AAA’ was rejected as being overly simplistic.133 Given S&P knew or ought reasonably to have known that the AAA rating assigned to the Rembrandt Notes was not based on reasonable grounds or the product of the exercise of reasonable care, Jagot J confirmed that s 1041E had been contravened.134

In relation to the s 1041H claim, the key issue was whether S&P’s actions were misleading or deceptive, or were likely to mislead or deceive. This was a question of fact to be determined objectively.135 The fact that the Rembrandt Notes were ‘new and extraordinarily complicated, indeed, grotesquely so’ was highly persuasive for Jagot J.136 In light of such complexity, her Honour held that it would not have been reasonable for LGFS or the councils to have conducted their own detailed analysis.137 LGFS and the councils were unable to identify the erroneous assumptions made by S&P in reaching the AAA rating, and as such, S&P’s ‘representations were misleading and deceptive, likely to mislead and deceive and false in a material particular because the opinion was not based on reasonable grounds and S&P had not exercised reasonable care or skill in reaching the opinion’.138 Furthermore, Jagot J noted that S&P’s purported disclaimer139 was ineffective, particularly in light

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!132 Ibid 1195 [2908] (emphasis added). 133 Ibid. 134 Ibid 1195–6 [2910]. 135 Ibid 1009–10 [2416], 1196–7 [2913], quoting Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq) [2012] FCA 414 (23 April 2012) [46]–[48]. 136 Bathurst [2012] FCA 1200 (5 November 2012) 1198–9 [2915]. The inherent complexity of the Rembrandt Notes was relevant to Jagot J’s analysis as to whether the councils fell within the class of ordinary reasonable members protected by s 1041H. Having regard to the products’ complexity, her Honour held that the councils’ incapacity to understand the nature of the Rembrandt Notes did not preclude the benefit of s 1041H. In other words, the councils’ incapacity did not constitute an ‘extreme or fanciful’ assumption excluding them from the class of ordinary reasonable members: National Exchange Pty Ltd v Australian Securities and Investments Commission [2004] FCAFC 90 (22 April 2004) [18], cited in Bathurst [2012] FCA 1200 (5 November 2012) 1197–8 [2914]. 137 Bathurst [2012] FCA 1200 (5 November 2012) 1198–9 [2915]. 138 Ibid 1200 [2919]. 139 ‘[B]ecause of the possibility of human or mechanical error by our sources, Standard and Poor’s, or others, Standard and Poor’s does not guarantee the accuracy, adequacy or

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of S&P’s use of the clearly erroneous 15 per cent volatility figure.140 The effect of the disclaimer was also nullified given that S&P did not require that subsequent investors (namely, the councils) be provided with the disclaimer.141

In relation to the s 12DA claim, Jagot J was satisfied that S&P’s conduct in assigning the AAA rating fell within the scope of providing financial service advice (not simply financial product advice as argued by S&P).142 Accordingly, the s 12DA claim was also successfully made out.143

2 Common Law Negligence The second broad cause of action brought by the councils and LGFS against S&P was that S&P had been negligent in issuing and publishing the erroneous AAA rating.

In order to establish a successful negligence action, the party seeking to prove negligence (in Bathurst, the councils and LGFS) must show on the balance of probabilities all elements of the claim:

• the existence of a duty of care;

• breach of that duty;

• a causal link between the breach of the duty and eventuating damage; and

• damage that is not too remote from the breach.144

In Bathurst, Jagot J was satisfied that each of these elements were established by the councils and LGFS in their claims against S&P.145 A summary of each of the key elements will be provided below.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information’: ibid 1199 [2917]. 140 Ibid 1199–1200 [2917], where her Honour states: ‘[n]o reasonable reader would interpret this statement as meaning that S&P would not check for itself a representation from ABN Amro about the volatility of published indices’. 141 Ibid. 142 Ibid 1193–4 [2904]. 143 Ibid 1200 [2919]. 144 Ibid 1129 [2741]. 145 Ibid 1225 [2994].

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(a) Duty of Care Prior to Bathurst, a duty of care between a CRA and potential investors had never been recognised around the world.146 Thus, Jagot J was required to balance a number of factors or ‘salient features’ in order to establish whether a duty of care should exist at all.147 In concluding that S&P did in fact owe a duty of care to potential investors (including the councils and LGFS), her Honour evaluated a wide array of salient features:

• indeterminate liability;148

• vulnerability;149

• indirect relationship between S&P and the councils/LGFS;150

• contractual relationship between S&P and ABN Amro;151

• non-interference in ordinary commercial behaviour;152

• negligent misstatement requirements;153 and

• unlawful conduct of the councils.154

On balance, Jagot J was satisfied that these factors weighed in favour of recognising a duty of care between a CRA and potential investors.155 In addition, Jagot J asserted that there are sound policy reasons to recognise this category of duty. Her Honour explained that it was in fact more than reasonably foreseeable that potential investors would suffer loss if S&P !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!146 See Jones Day, Australian Federal Court Paves the Way for Actions against Financial Product Ratings Agency (2012) <http://www.jonesday.com/australian_federal_court/>; Ashurst London, Dispute Resolution Briefing: Credit Ratings Agency Held Liable to Investors in Australian Proceedings (2012) <http://www.ashurst.com/page.aspx?id_Content=8463>; Corrs Chambers Westgarth, Federal Court Sets the Standard with Standard & Poors (2012) <http://www.corrs.com.au/publications/tgif/federal-court-sets-the-standard-with-standard-and-poors/>; Rommel Harding-Farrenberg and Kieran Donovan, ‘Case Note: Duty of Care, Ratings Agencies and the “Grotesquely Complicated” Rembrandt: Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5)’ (2013) 14 Business Law International 185. 147 Bathurst [2012] FCA 1200 (5 November 2012) 1130–1 [2744]. 148 Ibid 1131–8 [2745]–[2766], 1211 [2950]. 149 Ibid 1138–43 [2767]–[2778], 1211 [2950]. 150 Ibid 1143–6 [2779]–[2787], 1211 [2950]. 151 Ibid 1146–9 [2788]–[2794], 1211 [2950]. 152 Ibid 1149–53 [2795]–[2803], 1211 [2950]. 153 Ibid 1153–5 [2804]–[2809], 1211 [2950]. 154 Ibid 1155–6 [2810]–[2813]. 155 Ibid 1157 [2814], 1160 [2819].

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negligently assigned an AAA rating to the Rembrandt Notes.156 The whole purpose of ABN Amro obtaining the rating was to disseminate it, so that potential investors could rely on S&P’s expert opinion in deciding whether or not to make the investment.157 When S&P assigned the AAA rating to the Rembrandt Notes, S&P knew and intended that the rating would be communicated to the councils.158 In fact, this was explicitly acknowledged by S&P in its ratings letter to ABN Amro, which ‘expressly and unconditionally permitted ABN Amro to “disseminate the … rating to interested parties”’.159 Further, the way in which ABN Amro used the assigned credit rating was hardly unusual. As a result, the existence of a duty of care between S&P and potential investors was considered appropriate in this case.160

(b) Breach of Duty S&P’s claims in relation to the risk of harm not being foreseeable and/or being insignificant were swiftly rejected by Jagot J. On the facts, her Honour held that the occurrence of the GFC did not render the risk of harm unforeseeable. Even though the GFC itself may not have been reasonably foreseeable, the class of harm causing the damage to the councils and LGFS (that is, the sustained widening of credit spreads) was foreseeable.161

Moreover, Jagot J disregarded S&P’s assertion that its opinions were reasonably held, and therefore not in breach of any alleged duty of care. Her Honour considered a number the deficiencies in S&P’s analysis, including the failure to take a reasonable and rational approach to its own modelling results, failure to recognise ‘readily identifiable’ erroneous assumptions, and failure to independently test the model provided by ABN Amro.162 Ultimately, S&P’s breach of duty was substantiated on the basis that S&P’s conduct involved ‘failures of such a character that no reasonable ratings agency

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!156 Ibid 1158–9 [2186]. 157 Ibid. 158 Ibid 1130 [2743]. 159 Ibid. 160 Ibid 1160 [2819], 1214 [2956]. 161 Ibid 1162 [2824]. In fact, sustained widening of credit spreads was ‘one of the two main anticipated risks the CPDO faced’. 162 Ibid 1165–7 [2830]–[2834].

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exercising reasonable care and skill could have committed [them] in the rating of the [Rembrandt Notes]’.163

(c) Causation Jagot J faced little difficulty in establishing the causal link between S&P’s negligence and LGFS and the councils’ loss. Her reasoning depended largely on evidence that LGFS would not have made its first investment in the structured financial product market without the assurance of an AAA rating, a fact that was known to ABN Amro.164 Her Honour was satisfied that S&P’s negligence was a necessary condition for the harm (in other words, but for the negligent AAA rating, LGFS and the councils would not have purchased the Rembrandt Notes in the first place, and thus would not have suffered loss).165

In addition, Jagot J did not view the failure of the councils to read and understand the S&P report as a valid intervening act. S&P did not require ABN Amro to communicate the S&P report alongside the AAA rating; S&P knew and intended the AAA rating to be a ‘stand alone’ representation of its opinion as to the creditworthiness of the financial product. 166 Other intervening factors submitted by S&P were also rejected, including the effect of disclaimers167 and the impact of the GFC.168 Overall, Jagot J concluded that there was a sound basis for establishing causation between S&P and the subsequent loss suffered by the councils and LFGS.

(d) Remoteness of Damage Finally, the ultimate loss incurred by the councils and LGFS was not too remote for the purposes of common law negligence. Although ‘the councils were three layers of relationship removed from S&P’, S&P had no reason to believe that the AAA rating assigned to the Rembrandt Notes would not be used to market the products through a number of potential investors.169 Such an arrangement was far from unusual, and therefore could not be considered excessively remote in the circumstances. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!163 Ibid 1167 [2836]. 164 Ibid 1169–70 [2845]. 165 Ibid. 166 Ibid 1170 [2846]. 167 Ibid 1179 [2863]. 168 Ibid 1183 [2876]. 169 Ibid 1186 [2882].

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B The Consequences of Bathurst The landmark decision in Bathurst has raised significant questions about the appropriateness of holding CRAs to account, as well as whether a duty of care should have been recognised in the first place. On the one hand, advocates for CRA reform are no doubt celebrating the world-first success against the previously immune entity; on the other hand, critics may feel that this decision has pushed the boundaries of the law one step too far. The decision in Bathurst has been of particular interest globally, given the Court’s willingness to impose not only statutory liability for misleading and deceptive conduct, but also a broader common law duty of care.170 It is suggested that other common law jurisdictions, such as the United Kingdom, may be influenced by this decision under the doctrine of persuasive precedent.171 There has been much speculation about the prospects of aggrieved investors in other jurisdictions seeking redress against CRAs for similar failings.172 But other commentary indicates that the ‘novel and controversial’ scope of Bathurst confines the case to its facts.173 Although the wider impact of Bathurst remains to be seen,174 the fact remains that S&P’s conduct (or lack of conduct) clearly failed to meet the basic standards of care, skill and diligence.

The uncertainties created by the current regulatory framework and Bathurst call for prompt resolution. It is clearly undesirable for the Australian financial market to take a ‘wait and see’ approach; the problems have persisted for far too long, and Bathurst itself demonstrates that it is no easy task for an aggrieved investor to succeed against a CRA.175 Although in theory, investors could continue to rely on the provisions raised in Bathurst, this represents an !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!170 Harry Edwards, ‘Liability for the Rating and Sale of Structured Credit Products: Australian Cases and Their (Much) Wider Implications’ (2013) 7 Law and Financial Markets Review 88, 90. Edwards further distinguishes between a narrower duty of care to avoid making statements that a CRA did not honestly believe, and the wider duty of care to avoid making statements that a reasonably competent CRA would not have made. 171 Ibid. 172 See Michael West, ‘Ruling on Ratings Has Big Implications’, The Age (Melbourne), 6 November 2012, 4; Glenda Korporaal, ‘S&P Case Could Spread to Europe’, The Australian (Sydney), 7 November 2012, 19; Hannah Low and Jonathan Shapiro, ‘S&P Ratings Could Cost Billions’, Australian Financial Review (Sydney), 6 November 2012, 1, 9. 173 Edwards, above n 170, 90, 95; see also Rommel Harding-Farrenberg and Kieran Donovan, ‘Case Note: Duty of Care, Ratings Agencies and the “Grotesquely Complicated” Rembrandt: Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5)’ (2013) 14 Business Law International 185, 193–4. 174 Harding-Farrenberg and Donovan, above n 173, 194. 175 Recall that Bathurst itself was an exceptionally complex, 1459-page judgment.

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indirect way of achieving better CRA standards. Bathurst represents a step in the right direction; but further, more direct action is required. This essay will now proceed to consider one possible option: a proposal to simplify CRA liability.176

V GOING FURTHER THAN BATHURST: A PROPOSED STATUTORY SOLUTION

A Setting the Scenario Credit rating agencies … should not simultaneously benefit from ratings-

dependent regulation and be insulated from lawsuits alleging negligence and

misrepresentation. If the agencies truly are private entities surviving based on

their reputations, they should be susceptible to the same sorts of lawsuits any similarly-situated private entity would be.177

As suggested by Partnoy, the impetus for credit rating reform is compelling. Financial market participants are demanding more accurate credit ratings, greater market discipline, and improved litigation certainty when things go wrong.

The main problem with existing legislative procedures is that they fail to effectively capture CRAs within their scope of operation. As discussed previously, CRAs are usually providers of ‘general advice’. As such, they are not subject to the more stringent standards imposed on AFS licensed providers of ‘personal advice’. Furthermore, the existing provisions outlawing misleading and deceptive conduct are difficult to establish, and not particularly suited to address the shortcomings of CRA liability. These problems clearly justify the adoption of a simplified legislative procedure that specifically addresses the standard of care obligations of CRAs.

This essay proposes the implementation of a clear statutory regime in relation to CRA liability. Such reform would not substantively change the law given the existing requirements to meet basic standards of care (see Bathurst); however, the proposed changes would clarify an investor’s position against CRAs. It would also circumvent the arguably contentious question of whether

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!176 Although US commentary is extensive, there appears to be relatively little commentary on this issue by Australian authors. The main article by an Australian author is Bunjevac, above n 22. 177 Partnoy, ‘The Siskel and Ebert of Financial Markets’, above n 40, 711.

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a duty of care should exist between CRAs and potential investors in the first place, thereby increasing the likelihood of acceptance of the proposed regime by the various players in the credit rating market.

This essay proposes that the simplified legislative procedure be modelled on the statutory action against manufacturers for defective products, found in s 138 of the Australian Consumer Law:

(1) A manufacturer of goods is liable to compensate an individual if:

(a) the manufacturer supplies the goods in trade or commerce; and

(b) the goods have a safety defect; and

(c) the individual suffers injuries because of the safety defect.

At this point, the reader is no doubt wondering: what possible utility does defective product liability offer here? The answer is this: persons suffering harm from defective products and so-called ‘defective’ credit ratings have more in common than one might think. Although provision for liability for these two categories of ‘product’ has traditionally been separated in legislation (the main distinction being that s 138 of the Australian Consumer Law concerns physical products, whereas credit ratings do not take physical form), the similarities between these areas of law are striking. These similarities justify the use of the defective product liability model to mould the proposed statutory reforms with regard to faulty credit ratings.

The defective product liability provision (formerly s 75AD of the Trade Practices Act 1974 (Cth)) was initially introduced to overcome the difficulty of proving common law negligence in relatively clear-cut cases.178 It sought to provide a simple avenue of recourse for wronged consumers of defective products, circumventing barriers such as the requirement for the plaintiff to establish reasonable foreseeability, causation and remoteness to ensure an optimal level of justice is achieved in the legal system.179 Causation was considered to be a major issue, given the ‘separation’ of the manufacturer and

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!178 Commonwealth, Parliamentary Debates, Senate, 26 May 1992, 2661–2 (Michael Tate, Minister for Justice and Consumer Affairs); Commonwealth, Parliamentary Debates, House of Representatives, 4 June 1992 3666–8 (Jeannette McHugh, Minster for Consumer Affairs). 179 Ibid.

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consumer by intervening parties such as retailers; the operation of negligence principles made it difficult for the aggrieved consumer to successfully claim against the manufacturer of the product, even when the manufacturer was clearly responsible for the defect.180

These same issues are faced by aggrieved investors who have suffered loss from reliance on flawed credit ratings. Although negligence was successfully established in the case of Bathurst, this was a tedious process, and investors may not enjoy the same level of success in the future.181 The enactment of a simplified statutory regime based on the defective product liability model would provide crucial redress for aggrieved investors in the future.

B Shaping the Scenario Using the defective product liability model as a starting point, this essay will examine three aspects of the proposed regime in relation to faulty credit ratings: the elements to be established by the aggrieved investor; the implementation of a defence based on obligatory standards; and the content of the proposed obligatory standards.182

1 Initial Elements The proposed statutory regime would require an aggrieved investor to prove three things, having regard to s 138(1) of the Australian Consumer Law. In bringing an action against a CRA for a purportedly ‘defective’ credit rating, the aggrieved investor must establish that:

1. the CRA supplied the credit rating in trade or commerce; and

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!180 This problem was exemplified in numerous Thalidomide-related actions: see, eg, Lesley Dolding, ‘Product Liability Reform: One Step Forward, One Step Back?’ (1988) 20 Bracton Law Journal 22; Jane Stapleton, ‘Products Liability Reform — Real or Illusory?’ (1986) 6 Oxford Journal of Legal Studies 392. 181 Bathurst may be confined to its facts in future cases: Edwards, above n 170, 95; Harding-Farrenberg and Donovan, above n 174, 193–4. 182 These considerations are by no means exhaustive, but an evaluation of all the possible factors to be taken into account when drafting the proposed statutory regime is beyond the scope of this essay. For example, further analysis is required about the extent of a CRA’s liability to the aggrieved investor, which could be total or proportionate. For related discussion on a proposal for a ‘modified’ strict liability regime, see John C Coffee Jnr, ‘Gatekeeper Failure and Reform: the Challenge of Fashioning Relevant Reforms’ (2004) 84 Boston University Law Review 301; Partnoy, Frank, ‘Barbarians at the Gatekeepers? A Proposal for a Modified Strict Liability Regime’ (2001) 79 Washington University Law Quarterly 491.

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2. the credit rating is defective; and

3. the investor suffered loss because of the defect.

If the investor successfully proves all three of these elements, the CRA ought to be liable to compensate the investor for the amount of loss or damage suffered by the investor.

It will not be difficult for the aggrieved investor to prove, under the proposed regime, that the credit rating was supplied ‘in trade or commerce’; the vast majority of credit ratings are issued and published in the commercial sphere, in that CRAs receive a fee for their rating services. It is likely that the scope of ‘in trade or commerce’ is sufficiently broad so as to encompass even unsolicited ratings, which may not attract a fee. The fact that CRAs operate as commercial entities further reinforces the idea that credit ratings are supplied ‘in trade or commerce’.

Under the proposed reforms, the aggrieved investor must prove that the credit rating was prima facie ‘defective’. The definition of ‘safety defect’ in s 9 of the Australian Consumer Law provides some guidance: products are deemed ‘to have a safety defect if their safety is not such as persons are generally entitled to expect’. Drawing on this definition, a credit rating under the proposed regime will be ‘defective’ where it is not of the safety (or quality) reasonably expected by an investor. Bathurst suggests that a credit rating will be free from ‘defect’ where the CRA has performed all activities reasonably expected of them, including verification of data inputs and comprehensive assessment of the financial product’s performance in all market conditions.183

Finally, the aggrieved investor must show that they suffered loss ‘because of’ the defect. Broadly, this requires the aggrieved investor to establish causation. As with s 138 of the Australian Consumer Law, a common sense approach should be adopted.184 The aggrieved investor could discharge this onus by pointing to evidence that they relied on the credit rating in making their investment decision. In Bathurst, this was demonstrated by the councils and

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!183 Bathurst [2012] FCA 1200 (5 November 2012). 184 Russell V Miller, Miller’s Competition and Consumer Law Annotated (Thomson Reuters, 35th ed, 2013) 1706 [1.S2.138.20].

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LGFS by showing that ABN Amro knew that LGFS would not have purchased the Rembrandt 2006–3 notes had they not been rated AAA, in part because LGFS had never dealt in a structured financial product before.185 Alternatively, it might be shown that the investor was prohibited from purchasing investment products below a minimum credit rating, and accordingly would not have made the investment at all, had the financial product been rated accurately in the first place.186

2 Defence of Obligatory Standards Once the proposed initial elements are satisfied by the aggrieved investor, that investor will have a prima facie successful action against the CRA. However, under the proposed regime, the CRA may discharge liability by demonstrating that despite the ‘defect’, the CRA should not be held liable for the investor’s loss due to its adherence with obligatory standards. This defence is based loosely on the s 142(b) of the Australian Consumer Law, which permits a defence to a defective goods action where the goods were defective ‘only because there was compliance with a mandatory standard for them’.

The use of the term ‘obligatory’ in the proposed reforms is deliberate. In the context of defective product liability, ‘mandatory’ standards are those standards that pertain to essential product safety features, and carry significant penalties for non-compliance. 187 They are contrasted with ‘voluntary’ standards, which are general minimum standards and do not carry penalties for non-compliance.188 Under the proposed CRA reforms, the issue of whether penalties should attach to non-compliance with the proposed CRA standards is not addressed.189 However, compliance with these proposed CRA standards is certainly not ‘voluntary’. Accordingly, the ‘obligatory standards’

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!185 Bathurst [2012] FCA 1200 (5 November 2012) 1169–70 [2844]–[2845]. 186 In Bathurst, the councils were limited by a policy whereby they could not invest in products with a credit rating lower than A (or equivalent), and that policy aimed for ratings ‘as high as possible and at least one or two notches above A’: ibid 1169 [2844]. 187 Australian Competition and Consumer Commission, Mandatory Standards (2013) Product Safety Australia <http://www.productsafety.gov.au/content/index.phtml/itemId/970773>. 188 Ibid; Colln Loveday, Clayton Utz, Getting the Deal through — Product Liability 2012 (2012) 6. 189 The imposition of penalties for non-compliance with the proposed CRA standards is likely to assist in achieving greater CRA discipline, but further discussion of this possibility is beyond the scope of this essay.

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defence under the proposed CRA regime is a modified defence modelled on the content of s 142(b) of the Australian Consumer Law.

Inclusion of the obligatory standards defence under the proposed regime will ensure that CRAs are not liable to aggrieved investors where there is nothing more they could have done to prevent the ‘defect’ (that is, the CRA was in full compliance with the obligatory standards under the proposed regime). In effect, it is a policy-based defence that recognises that although ‘defective’ credit ratings cannot be eliminated entirely from financial markets, CRAs’ actions (or inactions) play a crucial role in avoiding the issue and publication of some of these ‘defective’ credit ratings. The defence of obligatory standards will provide strong encouragement for CRAs to meet the requisite standards of care, skill and diligence in the performance of their work.

Ultimately, the defence of obligatory standards simply requires CRAs to do their job properly. In other words, the proposed reforms reinforce the expectations of investors and the financial markets as a whole. If CRAs are unable to perform the role reasonably expected of them, then they should be disciplined accordingly.

3 Content of Obligatory Standards In determining the content of the proposed obligatory standards for CRAs, it is useful to consider some principles from Bathurst and the IOSCO Code Fundamentals. The content of the proposed obligatory standards would clarify the minimum standards to be taken by CRAs in the performance of their work.190 In addition, the content of the proposed obligatory standards would fulfil a ‘defensive’ function, allowing CRAs to defend liability where a claim is brought under this proposed regime.

(a) Principles from Bathurst Firstly, Bathurst suggests that a reasonably competent CRA should independently calculate and verify inputs used in the credit rating process. This relates to the first criticism of the credit rating industry outlined in Part II(B)(1) above. In Bathurst, the volatility variable used by S&P in its analysis

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!190 The proposed obligatory standards are intended to go beyond what the tailored AFS licence conditions for CRAs currently achieve.

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was approximately half of what it should have been, therefore significantly distorting the simulated output of the credit rating model.191 The use of this ‘irrationally founded and unreasonably optimistic’192 variable should not have occurred; in fact, the breach of duty by S&P could have been avoided, had S&P calculated the volatility figure for itself. 193 The content of the proposed obligatory standards should therefore encompass an obligation on reasonably competent CRAs to use their own variables in the process of determining a credit rating.

Secondly, Bathurst indicates that a reasonably competent CRA should not make use of an incomplete model provided by the issuer, where that CRA knew or ought to have known that the model used unreasonably favourable assumptions.194 In Bathurst, Jagot J found that S&P accepted a number of clearly incorrect assumptions inherent in ABN Amro’s credit rating model, including the model’s failure to factor in the significant cost of ratings migration.195 In relying on ABN Amro’s models and calculations, S&P’s role in ‘rating’ the Rembrandt Notes was unacceptably diminished; it effectively relegated S&P to an all but rubber-stamping position.196 Under the proposed obligatory standards, reasonably competent CRAs must use their own (suitable) models in the credit rating process.

Thirdly, Bathurst advises that a reasonably competent CRA should conduct a thorough and comprehensive analysis of the financial product’s likely performance in all relevant market conditions. These include conditions that are reasonably anticipated (‘non-stressed’), and conditions that are exceptional but plausible (‘stressed’).197 Where a CRA simply fails to consider at least one of the two categories of relevant market conditions, it has not acted within the scope of a reasonably competent CRA.198 The proposed obligatory standards should oblige the reasonably competent CRA to exercise !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!191 Bathurst [2012] FCA 1200 (5 November 2012) 1081–2 [2614]. 192 Ibid 1105–6 [2681]; see also Edwards, above n 170, 89. 193 Bathurst [2012] FCA 1200 (5 November 2012) 1166 [2831]. 194 Ibid 1167 [2834]. 195 Ibid; see also Edwards, above n 170, 89. ‘Ratings migration’ describes the upgrade or downgrade of the instruments underlying the financial product; there are costs associated with replacing such instruments in the event of ratings changes. 196 Nagy, above n 21. 197 Bathurst [2012] FCA 1200 (5 November 2012) [2608]; see also Edwards, above n 170, 89. 198 See Bathurst [2012] FCA 1200 (5 November 2012) 1080–1 [2610].

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rigour in the assessment of the financial product’s creditworthiness under all relevant market conditions.

Finally, Bathurst requires that a reasonably competent CRA should conduct a separate credit rating analysis for each product. As noted previously, S&P assigned credit ratings to two distinct series of CPDO: Rembrandt 2006–2 and Rembrandt 2006–3.199 Although both series of Rembrandt Notes shared various similarities (for example, they were both CPDO products), the fact that the products were issued under different names indicates that individual credit assessments were warranted. In Bathurst, S&P failed to model the performance of the Rembrandt 2006–3 notes altogether.200 According to Jagot J, by the time S&P rated the Rembrandt 2006–3 notes, it must have known that the AAA rating could not be justified, but it assigned an AAA rating nevertheless.201 It is suggested that this was done ‘because of its treatment … as a repeat deal’.202 Such behaviour raises serious conflict of interest issues; the judgment alludes to the idea that S&P assigned the AAA rating to the Rembrandt 2006–3 notes in order to retain ABN Amro’s business.203 Conflicts must be avoided in order to defend the quality of credit ratings; the proposed obligatory standards should require a reasonably competent CRA to undertake discrete credit rating analyses for individual financial products.

(b) Principles from the IOSCO Code Fundamentals Under the proposed reformed statutory regime, the IOSCO Compliance Report could form crucial evidentiary support for a CRA seeking to show that it has in fact acted with the required level of care, skill and diligence in its work. This proposal is particularly advantageous given that it would not require onerous changes to the existing regulatory structure; it simply utilises the content of a document already created by CRAs. It is also consistent with the general findings of IOSCO that the IOSCO Code Fundamentals have functioned as ‘building blocks upon which CRA regulatory programs have

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!199 Ibid 23 [1]. 200 Ibid 1166 [2833]. 201 Ibid 1167 [2835]. 202 Ibid 1166 [2831]. 203 Ibid; see also above Part II(B)(5).

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been constructed’. 204 ASIC recommends the following 11 topics to be considered in an IOSCO Compliance Report:

1. Quality and Integrity of the Rating Process — Quality of the Rating Process;

2. Quality and Integrity of the Rating Process — Monitoring and Updating;

3. Quality and Integrity of the Rating Process — Integrity of the Rating Process;

4. CRA Independence and Avoidance of Conflicts of Interest — General;

5. CRA Independence and Avoidance of Conflicts of Interest — CRA Procedures and Policies;

6. CRA Independence and Avoidance of Conflicts of Interest — CRA Analyst and Employee Independence;

7. CRA Responsibilities to the Investing Public — Transparency and Timeliness of Ratings Disclosure;

8. CRA Responsibilities to the Investing Public — The Treatment of Confidential Information;

9. Disclosure of the Code of Conduct and Communication with Market Participants;

10. Arrangements to Monitor and Update Credit Ratings; and

11. Training Requirements for Representatives.205

CRAs may find that it is in their best interests to place additional emphasis on topics 1, 2 and 3; namely, those relating to the reliability of the credit ratings and the ratings process. Topic 7 in relation to transparency of ratings disclosure is also relevant. Without detracting from the remaining topics, CRAs should provide sufficient detail to unequivocally demonstrate that they have met the minimum requirements prescribed under the proposed response. For example, CRAs should fully describe the procedures they have

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!204 Technical Committee of the IOSCO, ‘Regulatory Implementation of the Statement of Principles Regarding the Activities of Credit Rating Agencies’ (Consultation Report, IOSCO, May 2010) 38. 205ASIC, ‘Credit Rating Agencies: Lodging a Compliance Report with ASIC’ (Information Sheet No 147, ASIC, December 2011); see also ASIC, ‘Credit Rating Agencies: IOSCO Code Annual Compliance Report’ (Consultation Paper No 160, ASIC, June 2011) 12.

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in place to ensure rigorous, systematic assessment of creditworthiness, as well as the steps taken to ensure that erroneous or misleading data are not used in the first place.206 Increased focus on these topics will encourage CRAs to be even more prudent in issuing and publishing accurate credit ratings. Not only do they face potentially adverse consequences for failing to do so, they must also turn their minds to the matter on a regular basis (in the drafting and submission of the ‘modified’ IOSCO Compliance Report).

C Testing the Scenario Now that this essay has presented a basic structure for the proposed reforms, it will proceed to evaluate two particular limitations of implementing the regime under the Australian regulatory framework. This evaluation seeks to critique the proposal, providing a limited form of scenario testing so as to draw some tentative conclusions as to whether and how the proposed reforms would work in practice.

1 When Subsequent Changes to Credit Ratings Are ‘Defective’ One key limitation of the proposed statutory regime is that, if modelled on the statutory action against manufacturers for defective products without qualification, it would only deal with credit ratings that are ‘defective’ at the outset (that is, at the time the credit rating is initially issued and published). Although the operation of this provision makes sense in the context of manufacturers’ liability for defective products, application in the context of CRAs presents some difficulty. The roles of the product manufacturer and CRA have been largely aligned up until this point; however, there is a divergence when it comes to the scope of each of these entities’ participation after the time of manufacture/issue and publication. While manufacturers are no longer actively207 involved in the transaction once the product passes to the retailer, such is not the case for CRAs. Even though the credit rating passes to the issuer, the CRA is charged with the ongoing task of updating credit ratings to reflect changes in the market. Thus, a failure to update credit ratings in a

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!206 Technical Committee of the IOSCO, IOSCO Code Fundamentals (2004) 4 [1.2], [1.6] <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD180.pdf>. 207 Inactive obligations include, for example, express warranties: see Attorney-General’s Department (Cth), Consumer Guarantees: a Guide for Businesses and Legal Practitioners (2010) 16.

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timely manner would not be considered ‘defective’ under the ‘defective’ credit ratings model.

This limitation could be overcome by ‘borrowing’ the continuous disclosure obligations from ch 6CA of the Corporations Act. In simple terms, s 674(2) obliges relevant entities to notify the market operator (that is, the Australian Securities Exchange) when information is not generally available, and a reasonable person would expect that information to have a material effect on the price or value of relevant securities. This obligation could be employed in the context of CRAs; in effect, to prevent CRAs from failing to promptly update (generally, downgrade) credit ratings to reflect changes in the market. Importantly, the objectives of this obligation in both the current listed entity and proposed CRA contexts are aligned: continuous disclosure is necessary to promote efficient financial markets, and to ensure investors are transacting on a fully informed basis.208 In practical terms, however, the main utility served by the continuous disclosure obligations is as a model only; none of the three major CRAs operating in Australia are listed entities for the purposes of s 674(2) of the Corporations Act.

2 Effectiveness/Desirability of Litigation Threat While exposing CRAs to an increased threat of litigation is likely to make them more attentive to the interests of investors, litigation-related remedies may not be the most appropriate way to improve the quality of credit ratings.209 In his analysis, Professor Coffee indicates that while such reform may alleviate some of the problems concerning CRAs, it may also have the effect of simply shifting conflict and compromise issues to another gatekeeper — the corporate lawyer involved in proceedings.210 There are also concerns about the effect on the credit rating market; CRAs may choose to leave the market if the threat of litigation is perceived as too onerous.211 In addition, although the threat of litigation is considered to have an essential deterrent effect on the regulation !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!208 See, eg, John Price, ‘Continuous Disclosure’ (Speech delivered at Chartered Secretaries Australia Annual Conference, Grand Hyatt Melbourne, 3 December 2012) <http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/continuous-disclosure-speech-published-3-December-2012.pdf/$file/continuous-disclosure-speech-published-3-December-2012.pdf>. 209 Coffee, above n 9, 334. 210 Ibid. 211 Ibid.

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of CRAs, the threat of litigation alone is not enough.212 Given the volume of resources available to sophisticated CRAs in today’s world, a stricter standard of liability could simply result in increasingly novel and creative interpretation of the law as applied to CRAs.213

Professor Coffee states this dilemma as follows: ‘Two almost contradictory reforms must be pursued together and in unison’.214 On the one hand, CRAs must be subjected to enough of a genuine threat of litigation so as to warrant deterrence; on the other hand, CRAs need to be governed by professional standards that provide sufficient flexibility, discretion and allow them to satisfy a ‘reasonableness’ standard of care.215

Nevertheless, it is contended that the statutory regime is designed to avoid these problems; the standard imposed on CRAs is not ‘stricter’ per se, it simply makes clear what CRAs must do in order to avoid being sued. In that respect, the proposed statutory regime achieves the objectives of imposing a threat of litigation while establishing some basic professional standards for CRAs to confidently undertake their credit rating function.216

VI CONCLUSION

CRAs have gotten away with far too much, for far too long. They have been known to abuse their position of power as crucial gatekeepers of global financial markets, with the largely innocent investor suffering the consequences. This situation cannot be sustained. In order to preserve the integrity of financial markets and transactions, investors must be satisfied that CRAs have performed their work in accordance with the basic standards of care, skill and diligence (at the very least). Where it is clear that this has not occurred, investors are reasonably entitled to a remedy for their losses — which, in turn, will have the effect of disciplining CRAs — and an appropriate mechanism to make this happen must exist.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!212 Ibid 370. 213 Ibid. 214 Ibid 371. 215 Ibid. 216 Presumably, the greater risk of litigation would be factored into the price of CRA ratings.

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In light of current regulation of CRAs in Australia and the recent decision in Bathurst, this essay has offered one possible means for addressing the perceived shortcomings of CRA liability in its present form. The proposed regime takes advantage of the similarities between manufacturers’ liability for defective products and CRAs’ proposed liability for flawed credit ratings. It aims to overcome the procedural hurdles faced by aggrieved investors under the current regulatory framework. Under the proposed reforms, investors will only be required to show a basic causal link between the ‘defective’ credit rating and the loss sustained by them. The CRA may then defend liability by showing that despite the ‘defect’, the CRA took all reasonable steps to perform their job in accordance with minimum standards of care, skill and diligence, and therefore that it should not be held liable for the investor’s losses. The content of this CRA-specific standard could be shaped by the findings in Bathurst, as well as the IOSCO Code Fundamentals (in conjunction with the AFS licence requirement for CRAs to submit IOSCO Compliance Reports on a regular basis).

The proposed statutory reforms have merit in that they provide much-needed procedural simplification for investors seeking remedy against CRAs. In cases such as Bathurst where it is clear that the CRA has failed to meet the basic standard of care, the reforms will provide an improved procedural mechanism for relief to vulnerable investors. In addition, the proposed regime clarifies the minimum steps to be taken by CRAs to minimise the prospect of adverse litigation consequences; in turn, creating greater certainty and reliability for financial markets as a whole. While there are some limitations associated with the proposed option, these limitations do not pose serious barriers to effective implementation of this reform.

It is essential that CRAs be appropriately regulated to reduce the likelihood of the mistakes made by S&P in Bathurst happening again. If mistakes are made, it is only reasonable for investors to be able to discipline a CRA for its failures. Implementation of the proposed statutory reform measures present a sturdy foundation for investors to rebuild their trust in the credit rating industry, ensuring that global financial markets are able to operate fairly and efficiently into the future.

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THE NATIONAL CONSUMER CREDIT REFORMS AND PAYDAY LENDING: MOVING TOWARDS A THICKER

CONCEPT OF CONSUMER SOVEREIGNTY?

MAJA CVJETANOVIC UNIVERSITY OF QUEENSLAND

Consumer sovereignty is a vital assumption in economic and legal ideas concerning consumer welfare and market participation. The predatory payday lending markets provide a paradigm example where this assumption lacks in practice. Australia recent consumer credit reforms, National Consumer Credit Protection Act 2009 (Cth) (‘NCCPA’), attempt to address these concerns through interventionist laws, which govern consumer choice. Ultimately, these developments present a challenge towards the traditional ‘thin’ neoliberal perceptions of consumer sovereignty and the non-interventionist policies, which underpin it. The legislative developments can be described as ‘thick’ versions of consumer sovereignty as they recognise the need to intervene into consumer affairs to enable consumer participation. The thicker concept of consumer sovereignty will be used as a comparative standard to critically evaluate whether the present reforms enhance consumer market participation as indicated through greater financial inclusion or whether, conversely, consumer participation is unduly hindered in favor of overly restrictive consequences. It will be argued that the recent payday lending reforms diverge from both the thin and thicker concepts of consumer sovereignty, due to their incomplete and atypically decontextualised nature. With this shortcoming in mind, the paper concludes that the reforms nevertheless present a potentially workable, albeit incomplete, response to a challenging consumer market.

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Traditional liberal conceptions of consumer sovereignty 1 support a non-interventionist approach towards consumer markets. The approach relies upon the assumption that consumers are sovereign, innately rational and therefore superior puppet masters of the market mechanism. Insights from the school of behavioral economics have placed doubt on these assumptions by painting a slightly dimmer picture of the consumer. 2 The school of behavioral economics recognises that that consumers are human with flawed perceptions, bounded rationality, unequal bargaining power and limited access to justice. In order to preserve promises of consumer participation that the thin concept merely assumes, this paper argues that consumer sovereignty is capable of dual of classification as both a ‘thin’ and ‘thick’ concept. In its thicker capacity, the need for greater intervention to empower consumer participation is recognised as a vital prerequisite. Australia has recently experienced reform to its entire consumer credit market with the National Consumer Credit Protection Act 2009 (Cth) (‘NCCPA’),3 which involved the transfer of regulatory control of the states to the Commonwealth,4 the establishment of a national licensing regime and the imposition on credit providers of responsible lending obligations.5 Payday lending was particular specie within the consumer credit market, which was the subject of further contentious political and legal debate. Payday lending raises acute challenges to traditional thin concepts of consumer sovereignty. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1 A term formally coined by WH Hutt: WH Hutt, Economists and the Public (Jonathan Cape, 1936). Whether Hutt’s originally intentions coincided with a broader liberal/neoliberal paradigm is certainly unclear and open to debate. This is outside the scope of the present paper, see: W Duncan Reekie, ‘Consumer Sovereignty Revisited’ (1988) 9 Managerial and Decision Economics 17. 2 See generally: D Kahneman and A Tversky, `Prospect Theory: An Analysis of Decision Under Risk' (1979) 47 Econometrica 263. 3 Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (Cth). Passed in accordance with suggestions of the Parliamentary Joint Committee on Corporations and Financial Services and Senate Economics Legislation Committee: Report of Parliamentary Joint Committee on Corporations and Financial Services of Inquiry on Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (December 2011) at [5.224], [5.232], [5.233]; Report of Senate Economics Legislation Committee on Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (December 2011) at [2.46]. 4 This occurred following the Productivity Commission’s recommendation: Productivity Commission, Review of Australia’s Consumer Policy Framework: Final Report, Canberra, 2008, 107, [5.2]. This reform took form as ‘Phase One’ of the reform package: The Hon Chris Bowen MP, ‘National Consumer Credit Protection Reform Package,’ (Media Release No 002, 25 June 2009).

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As such, special amendments to the NCCPA dealing with this area were not passed until 2010 and indeed the regulatory detail was only ‘bedded down’ in 2013.6 The current regulatory framework represents a shift from deregulation in favor of ‘decontextualised,’ interventionist legal policies. Ultimately, these developments present a challenge towards the traditional ‘thin’ perceptions of consumer sovereignty and the non-interventionist neoliberal policies, which underpin it. However, has the thicker concept of consumer sovereignty, in the form of greater consumer participation, been achieved? The thicker concept of consumer sovereignty will be used as a comparative standard to critically evaluate whether the present reforms enhance consumer market participation as indicated through greater financial inclusion or whether, conversely, consumer participation is unduly hindered in favor of overly restrictive consequences. It will be argued that the recent payday lending reforms diverge from both the thin and thicker concepts of consumer sovereignty, due to their incomplete and atypically decontextualised nature. With this shortcoming in mind, the paper concludes that the reforms nevertheless present a potentially workable, albeit incomplete, response to a challenging consumer market. The paper will introduce a dual approach to achieving consumer sovereignty. It will then survey the legal approaches permitted under the popular neoliberal, ‘thin’ conception of consumer sovereignty. Behavioral economics findings, together with the particular characteristics of the payday lending market, will be used to illustrate the shortcomings of the thin approach. Next, the paper will consider the legislature’s general preference for nuanced and contextualised legal considerations together with the motivations for its current decontextualised approach. The paper concludes by challenging the legislature to enable greater financial inclusion of the payday lender through an entirely different regulatory approach.

I DUAL CONCEPTION OF CONSUMER SOVEREIGNTY Consumer sovereignty is used to describe a market situation where all the production and supply of products and services bends to the consumers’

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!6 Consumer Credit Legislation Amendment (Enhancements) Act 2012 (Cth) Item 2.

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collective will. From this point of view, the ‘capitalist society is a democracy in which every penny represents a ballot paper.’ 7 The phrase ‘consumer sovereignty’ is capable of dual classification.8 In its ‘descriptive sense’ it refers to the factual situation of consumer as ‘the sovereign’ responsible for deciding what is to be produced and at what price.9 Essentially, the descriptive variant is a ‘thin conception’ of consumer sovereignty as it rests on the assumption that consumers consistently engage in rational decision-making by fulfilling preferences, which increase their overall wealth. This view is championed by the neoliberalist10 school of thought, which favors deregulation and freedom of consumer choice. The normative sense of ‘consumer sovereignty,’ offers a ‘thicker’ conception of what is required before the consumer reigns sovereign.11 The conception is thus used ‘as a criterion for evaluating the social desirability of different social situations and, through these, the desirability of the various public policies or institutional structures which give rise to them.’12 In the foregoing context, a thicker version of consumer sovereignty would ‘enable,’ rather than assume, consumer market participation. Market participation in the payday market is characterised by extensive ‘financial inclusion,’ which serves to measure the extent to which any given consumer has access to affordable and suitable credit. The notion serves as an essential measure in an environment where ‘credit’ is a normalised and essential part of the consumer household budget.13 This is because thicker conceptions of consumer sovereignty allow for more invasive interventions, accepting that the consumer may not only suffer from ‘bounded rationality,’ but also economic powerlessness and inability to bend

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!7 Ludwig Von Mises, Socialism (Jonathan Cape, 1936) 443. 8 Traditionally, the classifications employed consisted of the empirical (which the author refers to as ‘thin’) and normative (which the author refers to as ‘thick’): David Lowery, ‘Consumer Sovereignty and Quasi Market Failure’ (1998) (8) Journal of Public Administration Research and Theory 137, 140. 9 Ibid 139. 10 The author employs the term ‘neo’ liberalism which connotes the ‘temporal succession from the 19th-century economic liberalism to social democracy and socialism, and then to a new form of economic liberalism:’ Heikki Patomaki, ‘Neoliberalism and the Global Financial Crisis’ (2010) New Political Science 431, 434. 11 David Lowery above n 8, 140. 12 Jerome Rothenberg, ‘Consumers' Sovereignty Revisited and the Hospitability of Freedom of Choice’ (1962) 52 American Economic Review 269, 269. 13 Justin Malbon, ‘Predatory Lending’ (2005) 33 Australian Business Law Review 224, 230.

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the will of the powerful ‘producer.’14 As the state withdrew from market regulation legislatively engineered public and private policies began to falter from controlling some essential public goods and services, it became necessary that the ‘citizen’ assume the more taxing role of a rational ‘consumer.’15 The payday-lending scenario is but an example of how, for reasons of bounded rationality and bargaining inequality, the consumer has fallen short of this expected ideal.16 Consumers are seldom in a position to influence the market through participating by negotiating their bargains.17 While supply side dynamics and competition on its own, have fallen short of delivering benefits to consumer borrowers. 18 When the consumer is not sovereign or considerably weaker, the trader is at liberty to insist upon contractual provisions on a ‘take it or leave it basis,’ while extensive market homogenisation ensures, that the consumer has no choice but to ‘take it.’19 Essentially, traders can legislate by contract and do so ‘in a substantially authoritarian manner without using authoritarian forms.’20 The approach bears an essentially ‘paternalistic’ nature in the sense that it focuses on the ‘outcomes,’ of choice, rather than the freedom to exercise choice.21 The payday lending reforms are one product of the inherent tension between regulating

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!14 Russell B Korokobin and Thomas S Ulen, ‘Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics’ (2000) 88 California Law Review 1051, 1082. 15 Vijaya Nagarajan, ‘Reconceiving Regulation: Finding a Place for the Consumer’ (2007) 15 Competition and Consumer Law Journal 93, 97. 16 Oren Bar-Gill, ‘Seduction by Plastic’ (2004) 98 Northwestern University Law Review 1373, 1373. 17 See generally: Louise Sylvan, ‘Activating Competition: The Consumer – Competition Interface’ (2004) 12 Competition and Consumer Law Journal 191. Cf. DP Morgan, ‘Defining and Detecting Predatory Lending’ (Staff Report No 273, Federal Reserve Bank of New York, 2007) 22 (who argues that the lack of competition is reflective of the fact that there are too few lenders in the market). 18 Sylvan above n 17, 196. For a brief history of deregulation in the US context see: Mary Spector, ‘Payday Loans: Unintended Consequences of American Efforts to Tame the Beast’ in Michelle Kelly-Louw, James Nehf and Peter Rott, The Future of Consumer Credit Regulation (Ashgate, 2008) 112-115. 19 George Mitchell v Finney Lock Seeds Ltd [1983] 1 AER 109, 113 (Lord Denning). 20 F Kessler, ‘Contracts of Adhesion: Some Thoughts About Freedom of Contract’ (1943) 43 Columbia Law Review 629, 640. Cf. Richard Posner, Economic Analysis of the Law (Little Brown 6th ed, 2003). 21 AJ Duggan, ‘Some Reflections on Consumer Protection and the Law Reform Process (1992) 17 Monash University Law Review 252, 263. William Redmond, ‘Consumer Rationality and Consumer Sovereignty’ (2000) 58 Review of Social Economy 177, 182.

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consumer freedom, while at the same time, striving to magnify the effect of consumer choice. 22

II THIN CONCEPT OF CONSUMER SOVEREIGNTY: THE CONSUMER ‘IS’ SOVEREIGN

The thin concept of consumer sovereignty is synonymous with the neoliberal economic school of thought, which emphasises the importance of ‘freedom of choice.’ The reasoning being that, consumers’ choices are subjective, thus even if the choice to obtain a loan is not infallible, consumers are less likely to make a mistake about their wants rather than the state.23 However, the emphasis on consumers’ freedom of choice, contract and deregulation is supported by the belief that consumers are Homo Oeconomicus prototypes; both ‘rational’ and self-expedient 24 and that the majority of their subjective choices will correspond to rationally preferred outcomes.25 Hence, each consumer will seek a material increase in wealth in exchange for her loan preference; she will discriminate amongst different payday lenders for the best offer available.26 And so the reasoning goes, ‘if one seller offers unattractive terms, a competing seller, wanting sales for himself (sic), will offer more attractive terms.’27 It is argued that there need not be ‘haggling’ in every consumer transaction for this evolutionary process of market competition to take place.28 Freedom of choice is not, however, an end in itself. The ultimate value that neoliberalism promises through this process is greater market competition amongst

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!22 This is the central problem of most interventionist policies aimed at a thicker conception of consumer sovereignty: F Knox, ‘The Doctrine of Consumer’s Sovereignty’ (2005) Review of Social Economy 383, 393. 23 Duggan above n 21, 254. 24 Martin Buscher, ‘Ethics of the Market’ in Laszlo Zsolnai (ed) Ethics in the Economy: Handbook of Business Ethics (Peter Lang, 2007) 215. 25 MJ Trebilcock, ‘Rethinking the Consumer Protection Policy’ in Rickett and Telfer (eds) International Perspectives on Consumers’ Access to Justice (Cambridge University press, 2003) 93-94; Michael Faure and Hanneke Luth, ‘Behavioral Economics in Unfair Contract Terms’ (2011) 34 Journal of Consumer Policy 337, 353. 26 Knox above n 22, 385; WH Hutt above n 1, 290. 27 Posner above n 20, 116. 28 Ibid. Cf. Nicola Howell, ‘Catching up with Consumer Realities: The Need for Legislation Prohibiting Unfair Terms In Consumer Contracts’ (2006) 34 Australian Business Law Review 447, 459. See also: Florencia Marotta-Wurgler, ‘Does Contract Disclosure Matter?’ (2012) Journal of Institutional and Theoretical Economics 94, 97.

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traders.29 This economic exposition finds close expression in the common law and legislative approaches to consumer affairs. Firstly, ‘freedom of choice’ translates to classical contract law theory and the ‘freedom of contract’30 ideal, which favors individualism, self-reliance and the exercise of free will over government intervention and paternalism.31 The theory argues that contracts between parties are expressions of the freedom to choose and the results of self-expedient negotiation. 32 Any judicial interventions into the contractual terms reached have traditionally taken a narrow and procedural character. For instance, the common law remedy of misrepresentation provides that positive misrepresentations of present or past fact33 made by parties to a contract formed a ground for rescinding the bargain reached. 34 This common law exception is thought to prevent competing traders from enticing consumers on the basis of inaccurate information, or unfair competition.35 The exception is not concerned with the overall fairness of a consumer contractual transaction, but rather looks to the existence of a relevant misrepresentation of fact. On the other hand, slightly deeper considerations of ‘fairness’ have traditionally been enlivened in narrow circumstances.36 Under unconscionability, contracts can be set aside where ‘exploitation by one party of another’s position of special disadvantage’ exists. 37 Hence, the inquiry looks only to the existence of ‘procedural unfairness,’38 which focuses narrowly on whether the neoliberal preconditions

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!29 David Harvey, A Brief History of Neoliberalism (Oxford University Press, 2005) 61-2. 30 Korokobin and Ulen above n 14 1055. 31 Patrick Atiyah, The Rise and Fall of Freedom of Contract (Oxford University Press, 1979) Chapters 10 – 12. 32 Howell above n 28, 449. 33 Further, ‘puffery’ is similarly excluded, for example advertising a ‘wonderful place to live’ would not sound in damages, as a result: Pryor v Given (1980) 30 ALR 189. 34 Jeannie Paterson et al, Principles of Contract Law (Thomson Reuters, 3rd ed, 2011) 487. 35 Sylvan above n 17, 192. In similar vein, Lord Steyn has emphasised the need to ‘deter’ traders from engaging in fraudulently deceptive practices in order to uphold market transparency and information: Smith New Court Securities Ltd v Citibank NA [1996] 3 WLR 1051. misrepresentations resulting in rescission: Derry v Peek (1889) 14 App Cas 337, 374-5. 36 David Harland, ‘The Statutory Prohibition of Misleading or Deceptive Conduct in Australia and Its Impact on the Law of Contract’ (1995) Law Quarterly Review 100, 111. 37 Commercial Bank of Australia v Amadio (1983) 151 CLR 447, 474. 38 The distinction between ‘procedural’ and ‘substantive unfairness was first championed by Leff in the context of contracts. It has since proved to be a popular distinction in contract law: Arthur A Leff, ‘Unconscionability and the Code: The Emperor’s New Clause’ (1967) 115 University of Pennsylvania Law Review 485. Cf. Andrew Phang, ‘Security of Contract and the Pursuit of Fairness’ (2000) 16 Journal of Contract Law 158, 162 (who argues that the

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of contractual negotiation were interrupted by harms flowing from ‘external’ pressures.39 Judicial considerations of the ‘fairness’ of the terms used would ultimately offend against the consumer’s rationality 40 and freedom of contracting.41 This approach is largely ‘weighted against the consumer,’42 whose vulnerability and unequal bargaining power, without more, is not a basis for contractual relief.43 Ultimately, the court’s role is to uphold the bargains reached44 and contractual certainty.45 Secondly, the economic rhetoric also underpins modern moves towards privatisation and deregulation. 46 Deregulation was generally thought to inspire greater choice and market competition between traders. 47 At a legislative level, the thin conception of consumer law favors deregulation as a means of promoting a ‘freedom of choice.’ In Australia, banking deregulation commenced in the 1960s reaching a substantially deregulated market in the 1980s.48 Deregulation prompted the removal of controls on interest rates and

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!distinction is ultimately artificial and unhelpful); In addition, the person seeking to rely on the remedy must identify as having a ‘disability,’ which does not include a mere inequality in bargaining power: Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51, 64. The remedy also depended on the defendant having knowledge and notice of the weakness, as a prerequisite to exploiting it: Commercial Bank of Australia v Amadio (1983) 151 CLR 447, 479 (knowledge or willful ignorance being the correct standard). 39 Rick Bigwood, ‘Conscience and the Liberal Conception of Contract: Observing Basic Distinctions Part I’ (2000) 16 Journal of Contract Law 1, 21. 40 Ibid 20. 41 Bigwood above n 39, 22; Howell above n 28, 459. 42 Howell above n 28, 463. 43 Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51, 64. See also: L J Priestley, ‘Contract — The Burgeoning Maelstrom’ (1988) 1 Journal of Contract Law 15, 19; Peter Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 26 Western Australian Law Review 1, 23. See also: [i]f unconscionability were regarded as synonymous with the judge’s sense of what is fair between the parties, the beneficial administrations of the broad principles of equity would degenerate into an idiosyncratic intervention . . .:’ Stern v McArthur (1988) 165 CLR 489, 514; Bigwood above n 39, 22. Cf. In some particular consumer cases, the courts have been more or less inclined to give effect to more substantive considerations of fairness, in the absence of real procedural aspects: Howell above n 28. 44 Howell above n 28, 449. 45 Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711 46 Nagarajan above n 15. 47 Buscher above n 24, 214. 48 Nicola Howell and Therese Wilson, ‘Access to Consumer Credit: The problem of Financial Exclusion in Australia and the Current Regulatory Framework’ (2005) 5 Macquarie Law Journal 127. The process has been undertaken in other comparable jurisdictions such as the UK and the US, see: Avner Offer, The Challenge of Affluence: Self-Control and Well-Being in the United States and Britain Since 1950 (Oxford University Press, 2006) 357.

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employed a ‘guideline’ based system of oversight over the financial market.49 The successive waves of reforms intended to increase market competition by lowering the barriers to entry and increasing consumer choice of financial products.50 It was assumed that demand for consumer credit would urge supply, leading to a so-called ‘democratisation of credit’ where all classes of credit consumers would be catered to.51

A Responding to Consumer Interests Through ‘Responsibilisation’ Where consumer markets fail to deliver what would otherwise flow from the assumed circumstances, there are limited avenues of legal intervention. The intervention is minimal and is supported by a restricted notion of ‘market failure.’52 The thin neoliberal approach to consumer sovereignty recognises that consumers suffer from information asymmetries in the marketplace.53 An ‘informational asymmetry’ warrants regulatory intervention though increased disclosure54 of information, on the basis that it signals a ‘market failure.’55 Market failure occurs where the asymmetry between consumers’ and traders’ knowledge leads to a situation where uninformed consumers base their purchasing decisions exclusively on the obvious price, as a result of which higher quality goods and contractual terms are driven from the market and !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!49 A Tyree and P Weaver, Weerasooria’s Banking Law and The Financial System in Australia 2006 6-9. 50 S Wallis, Financial Systems Inquiry Final Report, 1996. See also: Ric Battelino, ‘Australia’s Experience With Financial Deregulation’ (Paper Presented at Address to China Australia Governance Program, Melbourne, 16th July 2007) 2. (who, after some years, praises the deregulatory approach for having achieved greater competition and efficiency amongst financial service providers). 51 Ian Ramsay, Consumer Law and Policy: Text and Materials (Hart Publishing, 2nd ed, 2007) 515. 52 Iain Ramsay and Toni Williams, ‘The Crash that Launched a Thousand Fixes: Regulation of Consumer Credit After the Lending Revolution and the Credit Crunch’ Niamh Moloney and Kern Alexander (eds), Law Reform and Financial Markets (Edward Elgar Publishing, 2011) 227. 53 Richard A Epstein, ‘behavioral Economics: Human Error and Market Corrections Symposium, Homo Economicus, Homo Myopicus, and the Law and Economics of Consumer Choice’ (2006) 73 University of Chicago Law Review 111. 54 Disclosure, in this context, refers to a legislatively mandated provision of information to consumers by credit providers, above and beyond that which they would have voluntarily provided for marketing purposes and to satisfy the common law’s requirements for certainty of contract. In other words, these reforms remedy the reluctance of traders to disclose potentially complex and unfavorable characteristics of their respective products. 55 Iain Ramsay, Consumer Law and Policy (Hart Publishing 2nd ed, 2012) 43. Market failure is an ‘elastic concept’ which is construed to mean, narrowly, ‘information asymmetry’ within the context of neoliberal schools of thinking. Though, market failure may include, for example, the systematic inability of consumers to wage legal actions against traders/lenders, see: Ramsay and Williams above n 52, 227.

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the unfavorable goods and non-core contractual terms become standardised.56 The approach plainly assumes that it is possible to redress the imbalance between borrowers and credit providers, by recreating the preconditions of the ideal neoliberal market, through addressing informational deficits. 57 Ramsay has referred to the disclosure approach as ‘responsibilisation’58 of the consumer, which promotes the education and empowerment of consumers through increased disclosure of information.59 Proponents of the approach anticipate that once the information asymmetry is corrected, consumers would utilise and act upon the information, rationally.60 As a result, market competition would increase by ensuring goods and services reflective of consumer expectations and preferences.61 At an international level the Organisation for Economic Co-Operation and Development

(‘OECD’), staunchly promotes financial literacy campaigns as the most superior means of

empowering the consumer to better stimulate market competition and innovation.62 In line

with this trend, the Australian legislature has followed in the footsteps of its United States

(‘US’) counterpart63 to enact laws preferring greater disclosure in the consumer finance

market. Broadly, these laws have included several legislatively enforced disclosure

mechanisms. Starting with the previous regime, under the Uniform Credit Law Agreement

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!56 GA Akerlof, ‘The market for “lemons”: quality uncertainty and the market mechanism’ (1970) 84(3) Quarterly Journal of Economics 488–500. To provide an illustration, both Service A and Service B operate within the same market, offering substantially similar consumer goods/services. However, owing to unfavorable contract terms (for example, contractual terms which shift the risk of loss to the consumer, away from the service provider) or poor quality, Service B is much cheaper. Service A, on the other hand, is the favorable, albeit a more expensive option. In a market where information asymmetry prevails, Service A will be driven out of the market. While the popularity of Service B will ensure that unfavorable contractual terms become standardised to the detriment of consumers. 57 Ramsay and Williams above n 52, 224. 58 Iain Ramsay, Consumer Law and Policy (Hart Publishing 2nd ed, 2012) 10. The term has since gained popularity with other writers in the field: Faure and Luth above n 25, 341. See generally: Therese Wilson, ‘The Responsible Lending Response’ in Therese Wilson (ed) International Responses to Issues of Credit and Over-Indebtedness in the Wake of Crisis (Ashgate, 2013). 59 Iain Ramsay, Consumer Law and Policy (Hart Publishing 2nd ed, 2012) 10. See also: Gail Pearson, ‘Financial Literacy, Consumer Banking and Financial Advice’ in Justin Malbon and Luke Nottage (eds), Consumer Law and Policy in Australia and New Zealand (The Federation Press, 2013) 262. 60 Faure and Luth above n 25, 343. 61 Geraint Howells, ‘The Potential Limits of Consumer Empowerment by Information’ (2005) Journal of Law and Society 349, 355. 62 OECD, Improving Financial Literacy: Analysis of Issues and Policy (Washington DC: OECD, 2005), 35; Toni Williams, ‘Empowerment of Whom and for What? Financial Literacy Education and the New Regulation of Consumer Financial Services’ (2007) 29(2) Law & Policy 226. 63 Truth in Lending Act 15 USC § 1601 (enacted for the purposed of: protect the consumer against unfair credit billing and credit card practices). From hereon ‘TILA.’

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1993 (‘UCCC’),64 which was broadened to specifically encompass the payday lending market.65

Under the regime, payday lenders were subjected to disclosure requirements, which required

disclosure of the terms of the loan, the costs and a copy of the loan agreement.66 The recent

NCCPA amendments have also introduced ‘compulsory licensing regime,’ which requires

licensees to provide ‘credit guides’ to potential customers. The regime requires persons

engaged in a ‘credit activity,’67 which broadly68 includes credit providers, ‘credit service’

providers 69 and ‘credit assisters,’ 70 to provide disclosure. 71 The matters required to be

disclosed include the characteristics of the loan product as well as the rights the borrower has

under the new lending laws, the substance of which will be discussed below. 72 The

responsibilisation approach assumes that once the borrower is properly informed of the terms

of their financial product, they will draw upon their inherent rationality and bargaining power

to achieve an appropriate outcome to their situation,73 enabling ‘responsible lending’ practices

amongst providers.74 Proponents of the thin approach to consumer sovereignty fail to endorse

wider concepts of market failure, which would warrant further market interventions.75

Instead, reliance is placed on the consumers’ collective ability to learn from error.76 However,

studies have confirmed that the standardisation of unfavorable contractual terms cannot

simply be remedied by disclosure. This is because most consumers will either be deterred

from considering the disclosed material due to time costs, or will not appreciate the

significance of such information, owing to their limited rationality.77 These findings question

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!64 Consumer Credit (Queensland) Act 1994 (Qld). 65 Queensland Office of Fair Trading, Payday Lending – A Report to the Minister of Fair Trading (Queensland Government, 2000) iii. Consumer Credit (Queensland) Amendment Act 2001 s 7(1). 66 Uniform Consumer Credit Code (Qld) ss 14, 15. 67 Credit activity is defined according to the different credit service offered (credit services, consumer leases etc.): National Consumer Credit Protection Act 2009 (Cth) s 6. 68 The intention of such a wide definition is to capture credit assisters such as mortgage brokers, as well as credit providers: Bruce Taylor, ‘New National Responsible Lending Obligations – Pt 1’ (2011) 39 Australian Business Law Review 464, 466. 69 National Consumer Credit Protection Act 2009 (Cth) s 7. 70 National Consumer Credit Protection Act 2009 (Cth) s 8. 71 National Consumer Credit Protection Regulations 2010 reg 26A. 72 In short, the matters that must be disclosed include: fees payable, for whom the credit providers acted for, any commission payable, membership of dispute resolution schemes, the consumer’s entitlement to receive a copy of the preliminary credit assessment, and the statement of prohibition on providing an unsuitable credit contract. The breach of these obligations may result in a civil penalty payable to ASIC or a debtor responsible for taking the action: National Consumer Credit Protection Act 2009 (Cth) Sch 1 ss 111-123 (‘NCC’). 73 Rashimi Dyal-Chand, ‘From Status to Contract: Evolving Paradigms for Regulating Consumer Credit’ in Michelle Kelly-Louw, James Nehf and Peter Rott, The Future of Consumer Credit Regulation (Ashgate, 2008) 56. Oren Bar-Gill, ‘Consumer Contracts: Behavioral Economics vs Neoclassical Economics’ (2007) New York Centre for Law and Economics 1, 35. 74 Iain Ramsay, ‘Consumer Law, Regulatory Capitalism and the ‘New Learning’ in Regulation’ 9 (2006) Sydney Law Review 9, 13. 75 Epstein above n 53, 114. 76 Jennifer Arlen, ‘Comment: The Future of Behavioral Economic Analysis of Law’ 51 Vanderbilt Law Review 1765, 1768. 77 For a summary of the findings, see: Iain Ramsay, ‘Consumer Credit Regulation as “The Third Way”?’, Keynote Address, 2nd National Consumer Credit Conference, Melbourne,

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the rationality assumption and provide need for a more substantive variant of consumer

sovereignty under the guise of invasive legal interventions. 78 The school of behavioral

economics better explains how the disclosure approach to consumer interests is an ineffective

and incomplete measure. The behavioralist findings will be couched within an analysis of the

payday lending market. As a result, the general characteristics of payday lending will precede

the behavioral economics discussion.

III PAYDAY LENDING: THE CONSUMER IS NOT SOVEREIGN

A The Payday Lending Market While consumer credit is a commercial institution predating the existence of currency itself,79 the modern day payday loan can be traced to the 1900s United States practice of ‘wage buying.’ A typical wage purchasing transaction saw a borrower receiving $5 on Monday, in exchange for promising to pay the lender back $6, on Friday.80 Essentially, borrowers were ‘borrowing back their own money’ to make ends meet prior to their respective payday.81 Since the 1980s, Australia has experienced a progressive increase in payday lending.82 Payday loans are typically a few hundred to two thousand dollars in value, to be repaid anywhere from sixteen days to one year. 83 Given this expansion in the loan’s duration, the payday loan is more accurately described as a ‘small amount’ credit contract.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!November 2004. 78 Duggan A, ‘Economic Analysis of Standard Form Contracts: An Exposition and a Critique’ in Cranston, R and Schick A (eds), Law and Economics (Department of Law, Research School of Social Sciences, 1982) 152. Cf. Stephen P King and Rhonda L Smith, ‘The Shaky Economic Foundations of Consumer Protection Policy and Law’ (2010) 18 Competition and Consumer Law Journal 71, 86 (who question the ability of behavioral economics to form a solid foundation for consumer reform). 79 Sidney Homer and Richard Sylla, A History of Interest Rates (John Wiley and Sons, 1996, 3rd ed) 17. See also: Paul Einzig, Primitive Money in its Ethnological, Historical and Economic Aspects (Eyre and Spottiswoode, 1966) 362-363. 80 Christopher Peterson, Taming the Sharks: Towards a Cure for the High Cost Credit Market (University of Akron Press (2004). 81 Uriah King and Leslie Parrish, Springing the Debt Trap: Rate Caps are the Only Proven Payday Reform (Centre for Responsible Lending, North Carolina, 2007) 7. 82 Zac Gillam and The Consumer Law Action Centre, ‘Payday Loans: Helping Hand or Quicksand?’ (Consumer Law Action Centre, 2010) 170. 83 Denise McGill et al, ‘Regulating the Cost of Small Loans: Overdue or Overkill?’ (2012) 30 Company and Securities Law Journal 149, 150; Sally Anderson, ‘Mapping the Terrain: The Last Decade of Payday Lending in Australia’ (2011) 39 Australian Business Law Review 5, 5.

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Payday loans invite controversy because they are considered as a variant of ‘predatory lending’ practices.84 The loans are considered predatory and unfair due to the relatively exorbitant rates charged by lenders to an economically vulnerable borrowing demographic.85 According to the standard ‘Annualised Percentage Rate’ (‘APR’)86 measure, a payday loan of thirty-one days in duration for $100, with a fee of $28, equates to an APR of 329.67%.87 Clearly, this is a significant deviation from the APRs charged for comparative consumer financial products such as personal loans 88 or credit cards. 89 Admittedly, however, payday loans are uncharacteristic of most financial products owing to their comparatively short-term nature,90 and risk-prone borrowing demographic. Therefore, expectedly, the pricing structure to finance the payday businesses differs by relying on ‘fees’ as opposed to more gradual ‘interest rates.’ 91 The APR measure is therefore somewhat too alarmist and misleading.92 Instead, the essential problem for the payday market is the prevalence of refinanced loans or ‘rollovers.’93 The incidence of continued loan ‘rollovers’ amongst borrowers has been referred to as a symptom of the ‘sweat box tactics’94 employed by borrowers. Lenders who

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!84 For example, predatory lending practices are prevalent within the mortgage home loan lending market: Lee Aitken, ‘A ‘Duty to Lend Reasonably’ –New Terror for Lenders in a Consumer’s World?’ (2007) 18 JBFLP 18. 85 Cf. Donald P Morgan and Michael R Strain, ‘Payday Holiday: How Households Fare After Payday Credit Bans’ 2007 – 2008 (Federal Reserve Bank of New York Staff Report, No 309) 21 (emphasis added). 86 Geraint Howells and Stephen Weatherill, Consumer Protection Law (Ashgate, 2005) 316. 87 Nimble Australia Pty Ltd, How Much Does It Cost? (2nd January 2014) Nimble: Smart Little Loans <https://nimble.com.au/Costs> (Current figures were extracted from this website); Queensland Office of Fair Trading, Payday Lending – A Report to the Minister of Fair Trading (Queensland Government, 2000) 9. 88 Commonwealth Bank of Australia, Personal Loan Repayment (20th January 2014) A personal loan for $5 000 on a fixed rate, monthly repayment plan equates to an APR of 13.9%: <https://www.commbank.com.au/personal/personal-loans/personal-repayments-calculator.html> 89 APRs of 20% and above form the costlier rates of credit card contracts. Of course, much depends on the specific product chosen: Commonwealth Bank of Australia, Credit Card Selector Tool (2oth January 2014) <https://service.commbank.com.au/tools-and-calculators/PersonalCreditCardSelector/personalCreditCardSelector/CreditCardSelector.aspx#1> 90 Nicola Howell, Therese Wilson and James Davidson, ‘Interest Rate Caps: Protection or Paternalism?’ (Centre for Consumer and Credit Law, December 2008). 91 Morgan and Strain above n 85, 21. (emphasis added) 92 Anderson above n 83, 7; King and Parrish above n 81, 5. 93 It has been reported, that typical payday consumer takes 9 -13 of such loans as a result of the debt spiral: Gillam above n 82, 126. 94 Luke Nottage and Souichirou Kozuka, ‘Lessons from Product Safety Regulation for Reforming Consumer Credit Markets in Japan and Beyond’ (2012) 34 Sydney Law Review 129, 137.

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employ the tactics anticipate that their customers are unable to pay off their respective debts in time, and therefore, employ fee structures to ensure that the customer undertakes multiple loans before the initial sum is paid off.95 Statistics indicate that a vast majority of payday loans are undertaken to refinance a preexisting loan, shortly after the pre-existing loan had become payable.96 The common justifications used by payday lenders for this tactic are centered upon the need to secure business viability and reduce the risk that each borrower presents.97 In fact, industry representatives have commented that their business would not function without the high incidence of ‘rollovers.’98 To use a hypothetical, Person A suffers a financial shock to already dwindling finances and, as a result, borrows $350, which includes a ‘borrowing fee’ of $84. At the end of the fortnight, Person A does not have enough to pay off the loan, but has another $84 to finance a rollover.99 After a year it is not unusual to find that Person A has paid some $2 500 in fees but still owes the principal $350 borrowed100 due to Person A’s constant inability to repay the principal sum borrowed within the allocated time. An awkward ‘reverse Robin Hood effect,’ 101 is thereby created with the ‘poor paying more’ 102 for financial products. Studies observe that debt spirals from payday lending can lead to physical and psychological harm among borrowers.103 Adding to the commonly criticised practices, it goes without saying that the borrowing demographic consists of society’s most vulnerable citizens. The !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!95 Ibid. 96 King and Parrish above n 81, 10; Gillam above n 82, 33. 97 Marcus Banks et al, ‘Caught Short: Exploring the Role of Small, Short Term Loans in the Lives of Australians’ (Social Policy Unit, The University of Queensland, 2012) 66 98 “A note about rollovers. We are convinced the business just doesn’t work without them.” - Roth Capital Partners, as quoted in: King and Parrish above n 81, 11. 99 This hypothetical was loosely based on the extract in: Spector above n 18, 107. 100 Ibid. 101 Malbon above n 13, 224. 102 P Cartwright, Banks, Consumers and Regulation (Hart Publishing, 2004) 212. 103 Therese Wilson, ‘Responsible Lending or Restrictive Lending Practices? Balancing Concerns Regarding Over-Indebtedness with Addressing Financial Exclusion’ in Michelle Kelly-Louw, James Nehf and Peter Rott, The Future of Consumer Credit Regulation (Ashgate, 2008) 95. Cf. Katherine Porter, ‘The Damage of Debt’ (2012) 69 Washington Law Review 979 (who argues that psychological and physical harm flowing from over indebtedness has not been substantiated by empirical research).

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typical payday borrower is considered especially vulnerable, comes from a low economic background and usually utilises loan money for essential items and services.104 Consumers of this product type are usually welfare recipients,105 although middle-class households may exhibit indicators of similar economic vulnerability.106 As a result, payday loan practices have been widely described as a ‘harmful practice that preys on financially vulnerable members of the community’ by employing unfair loan terms, complicating price structures and misleading practices. 107 In addition, payday borrowers are further disadvantaged by their inability to challenge unfair contractual tactics through legal avenues, because access to courts and tribunals is itself expensive.108 Behavioral economics seeks to explain how the responsibilisation approach fails to correct the potentially harmful and ever-expanding payday lending market.

B Behavioral Economics and Payday Lending Relying on an intersection between psychology and economics, behavioral economics challenge the assumption that consumers are rational and capable of reaching a situation where their rational demands are sovereign.109 As such,

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!104 Spector above n 18, 109-110; Denise McGill et al, ‘Regulating the Cost of Small Loans: Overdue or Overkill?’ (2012) 30 Company and Securities Law Journal 149, 151-12; Nicola Howell, ‘Interest Rate Caps and Price Regulation in Consumer Credit’ in Justin Malbon and Luke Nottage (eds), Consumer Law and Policy in Australia and New Zealand (The Federation Press, 2013) 325. Cf. Thomas A Durkin, ‘An Economic Perspective on Interest Rate Limitations’ (1992) 8 Georgia State University Law Review 821. These include for instance food items, utility bills, and unexpected financial stresses to an already low income. While reports state that only a small proportion of payday borrowers spend the money on inessential items such as Christmas presents. While the industry of lenders reports to limit lending contracts on the basis of ‘need:’ Howell above n 90, 53. An example would include unforeseen repair costs to the family car, washing machine or unexpected medical bills, see for example: Dean Wilson, Payday Lending in Victoria – A Research Report (Consumer Law Centre Victoria Ltd, 2002) 71. 105 Gillam above n 82, 192; Christopher Field, ‘Pay Day Lending – an Exploitative Market Practice’ (2002) 27(1) Alternative Law Journal 36, 37 106 For example structural issues such as the rise of inflation, stability of wages together with a decreasing proportion of GDP spent on public funding into welfare and health programs has meant that middle-class incomes are not immune from significant financial stresses: E Warren and A Warren Tyagi, The Two-income Trap: Why Middle-Class Mothers and Fathers are Going Broke (basic Books, 2003) 8. 107 Malbon above n 13, 225. For a summary of definitions see, Banks et al above n 97, 55-6. 108 Christine Courmaleos et al, ‘Legal Australia-Wide Survey Legal Need in Queensland’ (Law and Justice Foundation of NSW, 2012) 209; Wilson above n 103, 93. 109 Duggan A, ‘Economic Analysis of Standard Form Contracts: An Exposition and a Critique’ in Cranston, R and Schick A (eds), Law and Economics (Department of Law, Research School of Social Sciences, 1982) 152.

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the behaviorialist school offers a better-informed view of the limits to consumer rationality and market participation.110 It recognises that consumer protection laws must stem from a complex matrix of politics, psychology and the law. It urges that the effectiveness of disclosure may depend upon the brevity and clarity of the disclosure materials.111 For instance, consumers may be deterred from utilising the disclosed information on the basis of length, complexity and the anticipated time costs. 112 Studies further show that consumers fail to alter their conduct to better reflect preferences, as either the information is often poorly understood113 or because personal biases might negate the effectiveness of an otherwise satisfactory understanding.114 In the former case, behavioral economics has justified simpler and improved disclosure mechanisms. For example, Bar-Gill has commented that an effective disclosure mechanism would directly confront consumer misperceptions, fuelled by their behavioral biases. This would address consumer ‘over-optimism’ by, for instance, disclosing exactly how many times the average payday loan consumer refinances his or her loan, the duration of the term and total amount paid, as a result.115 In fact, the current reforms to the NCCPA appear to have endorsed this approach. The NCCPA now provides that payday lenders must display ‘warning-type’ notices on their premises or

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!110 Howells above n 61, 364. 111 See for example: Paul O’Shea, ‘Simplification of Disclosure Regulation for the Consumer Credit Code: Empirical Research and Redesign’ (Report Prepared for the Standing Committee of Officials of Consumer Affairs, 2010); Queensland Law Society, Submission on the Commonwealth Treasury, Draft National Consumer Legislation, 21 May 2009, 10; Florencia Marotta-Wurgler, ‘Does Contract Disclosure Matter?’ (2012) Journal of Institutional and Theoretical Economics 94, 95. 112 Howells above n 61, 356; Richard Craswell, ‘Taking Information Seriously: Misrepresentation and Nondisclosure in Contract Law and Elsewhere’ (2006) 92 Vanderbilt Law Review 565, 578 (who argues that the provision of excess information dilutes the effectiveness of disclosures). 113 See for example: Ramsay above n 58, 11. 114 Howells above n 61, 360. Bar-Gill above n 73, 35. (emphasis added). 115 Bar-Gill above n 73, 39. Other examples of this approach to disclosure include the United Kingdom’s ‘minimum credit card’ repayments disclosure, which requires credit providers to warn credit card holders about the dangers accompanying minimum payments on their credit cards, regulations enacted under: Consumer Credit Act 1974 (UK) s 78(4)(a). The US approach to minimum payments includes a more explicit mathematical example, by warning: ‘making the minimum only the typical 2% minimum monthly payment on a balance of $1 000 at an interest rate of 17% would take it 88 months to repay the balance in full:’ US Bankruptcy Abuse Prevention and Consumer Protection Act 2005 s 1301. These considerations transform the character of disclosure into targeted disclosure or product warnings, typical in harmful and dangerous consumer product markets.

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online facilities for the perusal of prospective customers.116 The latter findings, on the other hand, that personal biases may negate objective understanding, have served as a basis for dispensing with disclosure’s ‘thin’ form of intervention altogether. 117 This is because certain groups of typically vulnerable consumers, such as payday loan borrowers, may prove ‘unmanageable,’118 by simple disclosure, rendering the disclosure approach ‘misconceived’ and futile.119 These conclusions have been confirmed within the Australian context. Field points out that the disclosure approach adopted by the previous regime under the UCCC was ‘hardly robust consumer protection.’120 In fact, some industry lenders in the payday market had already provided disclosure prior to the UCCC, with little success.121 The school of behavioral economics observes that disclosure mechanisms and adequate consumer understanding may prove futile in the payday market in several different respects. Payday borrowers are prone to overestimating their willpower, by placing undue reliance on their ‘ability to resist the temptation to finance consumption by borrowing.’122 In this sense, payday lenders may be ‘over-optimistic’ about their ability to repay the short loan within the specified timeframe, by overlooking continued and constant expenses to be incurred in the following week. 123 The notion of ‘hyperbolic discounting’ assists in explaining why payday consumers cannot consider present and future benefits using consistent and rational discount rates. This is why loan rollovers are a preferred response for delaying the ‘pain’ of weekly expenses, in preference for

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!116 National Consumer Credit Protection Act 2009 (Cth) ss 133CB (credit providers), s 124B (credit assistance providers), s 124B(2), 133CB(2) (non-compliance with these provisions is an offence). The warning include: ‘Do you really need a loan today?’ and ‘Short-term loans are expensive and may not solve your money problems’ together with the provision of alternative solutions and avenues for help: (warning notices to customers: National Consumer Protection Regulations 2010 (Cth) reg 28XXA(1)(c); website warning: reg 28XXB(c)). 117 Therese Wilson, ‘The Inadequacy of Current Regulatory Responses to Payday Lending’ (2004) 32 Australian Business Law Review 193, 197. 118 Ramsay above n 58, 10. 119 Dean Wilson above n 104, 197. 120 Chris Field, ‘Pay Day Lending – an Exploitative Market Practice’ (2002) 27(1) Alternative Law Journal 36, 38 121 Malbon above n 13, 236. 122 Bar-Gill above n 16, 1395. 123 Note the corollary to this is ‘over-skepticism,’ which does not affect the payday lending market: Bar-Gill above n 73, 37.

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instant, yet ultimately costly, financial stability.124 Economic vulnerability and emotion also play a significant role in subsuming any understanding or capability of rational reflection.125 Research confirms that payday borrowers share similar sentiments that the loans offered are ‘a rip off’ but acknowledge, ‘who else is going to lend?’126 In this connection, placing reliance on the ability of payday borrowers to learn from their ‘mistakes’ is entirely misguided.127 Thus the enduring popularity of the loans128 is attributable to both the stressful personal situations that motivate borrowers129 and a lack of market alternatives.130 Owing to either poor credit histories or other risk indicators, these borrowers are excluded by the mainstream lending institutions, which could potentially offer more equitable loans.131 Commentators note that, to date, the consumer inclusion envisaged by a ‘deregulatory’ approach to financial services has not occurred.132 Instead, mainstream finance providers have competed for the most profitable customer, financially excluding the more vulnerable, less profitable citizen. 133 From the payday lenders’ perspective, the borrowers’ financial exclusion and lack of choice preserves market complacency, whereby the lenders are safe to offer fairly homogenous products, which lack competition on price and cost structure. 134 Payday lenders are instead incentivised to compete solely on the privacy, convenience

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!124 When asked to complete a painful 7 hour task on either the 1st of April or the 15th, people naturally choose the earlier date. However, as the time to complete the task looms, people are inclined to take advantages to put off the task: Joshua Gans, ‘Protecting Consumers By Protecting Competition: Does Behavioral Economics Support This Contention?’ (2005) 13 Competition and Consumer Law Journal (2005) 1, 2. 125 Ramsay above n 58, 54. 126 Dean Wilson above n 104, 77. 127 Korokobin and Ulen above n 14, 1071-1072. 128 For example in Australia, the National Financial Services Foundation has observed that payday loans comprised $500 million in 2008, growing to $800 million by 2011: The National Financial Services Foundation, Submission to Financial Services and Credit Reform Green Paper (2008) 2-3. 129 Gillam above n 82, 186. 130 Nicola Howell, ‘National Consumer Credit Laws, Financial Exclusion and Interest Rate Caps: The Case for Diversity within a Centralised Framework’ (2009) 17 Competition and Consumer Law Journal 212, 323. 131 Campbell Committee, Australian Financial System: Final Report of the Committee of Inquiry into the Australian Financial System, 1981. An example of such loans offered by mainstream institutions includes the Brotherhood of St Laurence project, which will be discussed in greater depth below. 132 Wilson above n 117, 201. 133 Ibid. 134 Denise McGill et al, ‘Regulating the Cost of Small Loans: Overdue or Overkill?’ (2012) 30 Company and Securities Law Journal 149, 151.

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and speed with which the loans are granted.135 Indeed, behavioral economics reveals that lenders are incentivised to exploit behavioral limitations.136 For instance, payday lenders directly target vulnerable groups by employing strategic business locations, within close proximity of impoverished neighborhoods137 or government welfare offices, such as Centrelink.138 Other specifically identified biases exploited include the feelings of economic vulnerability and financial exclusion from mainstream lending institutions.139 ‘Payday lenders are very effective in taking advantage of difficult experiences their customers receive from mainstream lenders’ by providing a ‘quick and easy service’ making ‘vulnerable consumers feel welcome.’140 To this effect, payday lenders employ an unprofessional, friendly tone towards would-be clients, with statements like ‘[w]hen you get emails from me, I won’t be selling you payday loans [c]onsider me a friend.’141 Payday lenders advertise the ease with which credit can be obtained, emphasising the convenience, brevity and lack of paperwork, 142 rather than the potential economic issues that accompany such loans.143 In essence, the lenders take advantage of behavioral shortcomings to further their agenda, with little to no incentive for competing

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!135 Gillam above n 82, 92-93. 136 Howells above n 61, 359-60; Nagarajan above n 15, 95. 137 This has lead to some ingenious legislative responses in the US, including ‘zoning laws.’ In South Tuscon, each payday provider must be 1 000 feet away from another provider. This ensures that payday lenders cannot prey on ‘prime locations:’ Michael A Stegman, ‘Payday Lending’ Journal of Economic Perspectives 169, 175 138 Banks et al above n 97, 22 (78% of those interview were welfare recipients). 139 Ramsay above n 58, 61. A first-hand account of a payday lender suffices in this respect: I don’t feel good going in there. If I saw someone going in there I would say they’re broke or they must be in debt or something and I would go in there and people would be saying the same thing. I wouldn’t use it unless I had to. I would go to the bank and get a loan: Dean Wilson above n 104, 76. 140 Malbon above n 13, 232. 141 Gillam above n 82, 99. 142 See for example: Nimble Australia Pty Ltd, Don’t worry get up to $1200 paid within 60 minutes (2nd January 2014) Nimble: Smart Little Loans <https://nimble.com.au> (‘Don’t worry get up to $1200 paid within 60 minutes’); My Payday Place, Get a Payday Loan Today!’ (13th December 2013) My Payday Place Pty Ltd <http://www.mypaydayplace.com> (‘Fast, hassle free money’); Koala Payday Loans, Get an Instant Loan Today! (10th November 2013) Koala Payday Loans <http://www.koalapaydayloans.com> (‘We only have a few simple requirements to allow you to apply. You need to be at least 18 years old. You also need to be an Australian citizen and currently hold an Australian bank account. We will accept loan applications from anyone if they meet these criteria, even if you have bad credit!’). 143 Jet Lending, Need Cash Fast? (8th November 2013) Jet Lending <http://www.jetlending.com.au> (This website formed the exception to the author’s investigations, as it was the only website to feature self-help avenues for lenders and explains the dynamics of the ‘debt trap’).

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with other lenders on core terms such as the price of credit.144 The apparent gridlock against disclosure and consumer market participation often forms the basis for supporting more invasive reforms, which seek greater control over the payday lending market.145

IV THICK CONCEPT OF CONSUMER SOVEREIGNTY: THE CONSUMER

‘OUGHT TO BE’ SOVEREIGN The problem of determining how invasive consumer law reforms should become, before they descend from effective empowering techniques to undue restrictions of choice is especially contentious in the payday lending market. On the one hand, the inability of responsibilisation techniques to mend the status quo, inspires some advocates to completely reject the responsibilisation technique, in favor of ‘decontextualised’ ‘price ceilings.’ Price ceilings are deemed ‘decontextualised’ because they overlook individual consumer circumstances and assume that loans should not be tolerated above an identified price cap.146 While others, still, prefer the approach of completely outlawing the practice.147 Certainly, outlawing or even restricting the payday market through decontextualised price ceilings could spell financial exclusion for some borrowers. On the contrary, a ‘thin’ concept of consumer sovereignty would argue that payday consumers engage in rational decision-making by resorting to the only option available in a restricted market. 148 In this connection, Lehman argues that there is no such thing as an exorbitant charge for credit products as ‘it is entirely subjective to each voluntary participant.’149 Certainly, given the short-term nature of the loans and the highly risky

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!144 Iain Ramsay, ‘Consumer Credit Regulation as “The Third Way”?’, Keynote Address, 2nd National Consumer Credit Conference, Melbourne, November 2004. 145 Ramsay above n 58, 22. 146 McGill above n 83, 168. 147 Some United States (‘US’) jurisdictions have completely banned the practice. However, the ability of prospective borrowers to lend from other state jurisdiction largely renders bans futile: Marquette National Bank v First of Omaha Service Corp 439 US 299, 308 (1978). 148 Tom Lehman, ‘Payday Lending and Public Policy: What Public Officials Should Know’ (Marion, IN: Indiana Wesleyan University, 2006). Similar sentiments have been echoed elsewhere: Howells above n 61, 357. 149 Lehman above n 148, 9.

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borrowing demographic, it is feasible to argue that the payday lending is simply ‘impossible’ at lower costs.150 An over-reliance on the status quo, however, would lead to a highly impoverished view of consumer empowerment. The approach would do little to encourage competition among payday lenders; while at the same time, it would encourage questionable and potentially harmful marketing practices.151 At the same time the language of ‘impossibility’ is both persuasive but illusory. Studies observe that low-income lenders are capable of making loan repayments, when treated with some flexibility.152 Further, alternative lending institutions (both for profit and non-for-profit operation models) have proved to be workable businesses in the past, without charging exclusionary rates.153 It therefore becomes questionable whether the typical payday ‘sweat box’ blueprint is the only way. Given that deregulation has not achieved appropriate outcomes for the payday borrowing demographic, the sole operation of the price mechanism, signaled by the consumers’ ‘choice’ to pay must be discarded as a yardstick of consumer financial inclusion.154 For consumer sovereignty to have any meaning, consumer participation and financial inclusion must bend to the consumer interest by enabling access to ‘safe’ and ‘affordable’ lending alternatives.155 If one opposes the liberal view on these terms, it becomes clear that the demand for payday loans does not automatically justify supply.156 However, the very existence of demand must come with the sobering realisation that demand strongly signifies ‘structural inequities’157 faced by borrowers, and the need to promote a ‘financially inclusive’ market, which provides affordable and safe credit to consumers.158

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!150 Morgan and Strain above n 85. 151 Wilson above n 117, 197. 152 See for example a study conducted by Consumer Affairs Victoria: Consumer Affairs Victoria, The Report of the Consumer Credit Review (Consumer Affairs Victoria, 2006) 72. 153 Peterson above n 80, 836. 154 Howell above n 130, 212. 155 C Connolly et al, Measuring Financial Exclusion in Australia (Centre for Social Impact, University of NSW, 2012) 7. 156 Gillam above n 82, 184. 157 These may flow from welfare considerations coupled with the growing importance of credit in the every day lives of consumers: Georges Gloukiezoff, The Link Between Financial Exclusion and Overindebtedness (Progress Program Working Paper, EC 2007) 3. 158 Financial exclusion is defined as ‘the lack of access to by certain consumers to appropriate low cost, fair and safe financial products and services from mainstream providers:’ Chant Link and Associates, A report on financial exclusion in Australia (November, 2004) 58.

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An individualised consideration of the payday demographics’ needs and concerns, through legislative empowerment, could lead to a more inclusive, competitive market. In line with this argument, increasingly national legislators, regulators and policy-makers use the language of ‘consumer empowerment’ within the same context of market competition and sustainability. 159 This involves the recognition that ‘consumers not only benefit from competition [but that] they activate it’ and ‘one of the purposes of a consumer protection law is to ensure that they are in a position to do so.’160 Consumer sovereignty therefore becomes more than an assumption, but rather, a standard where the ‘performance of an economy [is] evaluated in terms of the degree to which it fulfills the wants of consumers.’161 McGill et al speak of the preexisting legislative methods towards consumer empowerment as ‘nuanced approaches,’ as they emphasise the importance of individual consumer circumstances and considerations, while placing no particular emphasis on any consideration above another. 162 Neoliberalism’s empty promise of freedom, consumer sovereignty, and competition ‘implicitly appeals to a longing for a more positive form of freedom, even while it simultaneously denies that possibility by erecting conceptual’ hindrances such as the unbridled freedom of choice and contract.163 This has provided an impetus for a holistic view of the consumer market, which unveils a broader array of ‘market failures.’ Therefore, in addition to the traditional ‘asymmetry of information,’ the nuanced and individualised approach recognises the asymmetries in bargaining power and the inability of consumers, as a group, to correct market failures.164

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!159 Pearson above n 59, 262. 160 R Bannerman, Trade Practices Commission, Annual Report 1983-1984 (AGPS, Canberra, 1984) 184. 161 Rothenberg above n 12, 269-70. 162 McGill above n 83, 164. 163 Betty Mensch, ‘Freedom of Contract as Ideology’ (1981) 33 Stanford Law Review 753, 771. 164 Morgan warns against the extensive use of economics nomenclature, such as ‘market failure,’ as a means of achieving successful reforms. She argues that this has the potential of ‘silencing’ certain issues which cannot be repackaged to suit the economics nomenclature: Bronwen Morgan, Social Citizenship in the Shadow of Competition: The Bureaucratic Politics of Regulatory Justification (Ashgate, 2003).

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A General Consumer Law Developments In recognition of both the importance and fragility of consumer market participation, consumer law has separated from classical contract law theory and its earlier roots in sale of goods law.165 Now the law encompasses broader court-developed exceptions to consumer market transactions166 as well as regulatory interventions. At common law and equity, the courts have striven to mitigate the harsh effects of an ‘illusory’ freedom of contact, through complex rules of capacity, circumstances that vitiate consent, unconscionable conduct in the procurement of contracts, penalties, implied terms, construction of contracts and restraints of trade.167

At a regulatory level, Schedule Two of the Consumer and Competition Act 2010 (Cth), the Australian Consumer Law (‘ACL’) and its predecessor the Trade Practices Act 1975 (Cth), represent significant deviations from consumer rationality by acknowledging the realities of the consumer marker and the consequent need for consumer empowerment.168 The approaches are individualised and depend upon both the ‘confidence in market mechanisms to address consumer needs, and in the ability of consumers to exercise their rights under consumer legislation.’169 These developments are by reflected by legislation prohibiting misleading conduct,170 where misrepresentations are increasingly judged according to the effect they would have on an average person belonging to the class to which the representee belonged or otherwise according to the individual circumstances of the case.171 Importantly, the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!165 Sale Goods Act 1958 (Vic); Sale of Goods Act 1923 (NSW); Sale of Goods Act 1896 (Qld); Sale of Goods Act 1895 (SA); Sale of Goods Act 1895 (WA); Sale of Goods Act 1896 (Tas); Sale of Goods Act 1954 (ACT); Sale of Goods Act 1972 (NT). 166 Some of these remedies have been mentioned earlier, but can be summarised as: misrepresentation (Vladsz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102); duress (Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40); Undue influence; unconscionability (Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447). 167 Lynden Griggs, ‘Intervention or Empowerment – Choosing the Consumer Law Weapon’ (2007) 15 Competition and Consumer Law Journal 111. 168 R Haurp, ‘Govt sets up task force to groom consumer lobbyists’, The Australian Financial Review (Monday, 28 May 1973) 7. 169 McGill above n 82, 166 (emphasis added). 170 Consumer and Competition Act 2010 (Cth) Sch 2 s 18. Note the prerequisites to the remedy being that the alleged misleading conduct took place within ‘trade or commerce:’ Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594. The legislation also affords consumers with greater remedial flexibility, remedying the previous common law position: Paterson et al above n 34, 475-476. 171 Demagogue v Ramensky (1992) 110 ALR 608, 618.

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relevant audience need not be rational, or of average intelligence.172

Similarly, the ACL has superseded the limited concept of unconscionability in consumer markets. 173 The current provisions are not limited to equity’s preference for procedural unfairness, 174 but include substantive fairness considerations such as an asymmetry in bargaining power175 and whether any contractual terms sought to be relief upon are truly necessary for the protection of the traders’ interest.176 The ACL also features remedies for unfair contract terms provisions,177 which mend the previous common law and legislative mischief that has failed to recognise unfairness in ‘standard form contracts.’ 178 The unfair contract terms provisions 179 apply exclusively to ‘standard form’ 180 ‘consumer contracts’ 181 that are ‘unfair.’ 182 While, the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!172 Annand and Thompson Pty Ltd v Trade Practices Commission (1979) 25 ALR 91, 102. 173 Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389, [291]. 174 Australian Competition and Consumer Commission v Lux Pty Ltd [2004] FCA 926 [18]. The section is deliberately unrestricted by the unwritten law Consumer and Competition Act 2010 (Cth) Sch 2 s 21(4). 175 Consumer and Competition Act 2010 (Cth) Sch 2 s 22(1)(a). 176 Consumer and Competition Act 2010 (Cth) Sch 2 s 22(1)(b); St George Bank Ltd v Trimarchi [2004] NSWCA 120. For interesting UK example of similar provision, see: OFT v Asbourne Management Services [2011] EWCA 1237 (There the court ruled that gymnasium membership plans requiring a minimum membership of 24 and 36 months, respectively, were ‘unfair.’ Kitchin J was persuaded by the behavioral economics finding that the average consumers over-estimated their gymnasium use. In addition, his Honour consulted expert economic evidence, which showed that the savings made through the low monthly rates offered by the defendants, were offset by the relatively high termination charges, which outweighed any discount received. This was confirmed by comparative rates offered by competing businesses). 177 The legislation was preceded by state Acts within New South Wales and Victorian jurisdictions: Contracts Review Act 1980 (NSW); Fair Trading Act 1999 (Vic) Pt 2B. 178 Nyuk Yin Nahan and Eilieen Webb, ‘Unfair Contract Terms in Consumer Contracts’ in Justin Malbon and Luke Nottage (eds), Consumer Law and Policy in Australia and New Zealand (The Federation Press, 2013) 132-33. ‘Some circumstance other than the mere terms of the contract itself would render the reliance of the terms of the contract unfair or unconscionable […]’ Hurley v McDonald’s Australia (2000) ¶ ATPR 41-741. 179 Under the provisions, unfairness is defined as a significant imbalance in the parties’ rights and obligations, which is not reasonably necessary to protect the legitimate interests of the party advantaged by the term, and further that reliance on the term would cause detriment to the disadvantaged party: s Consumer and Competition Act 2010 (Cth) Sch 2 s 24 (1)(a)-(c). For case examples from the Victorian jurisdiction, which predated the national reform, see: Director of Consumer Affairs v Backloads.com [2009] VCAT 754 (which gave the trader an unrestricted discretion in relation to the ways the goods were dealt with); Director of Consumer Affairs Victoria v Craig Langley Pty Ltd [2008] VCAT 482 (which gave the trader an unrestricted right to exclude liability, save for liability which could not be excluded by reason of statute); Director of Consumer Affairs Victoria v AAPT [2006] VCAT 1493. For an overview of the inefficacy of the Victorian unfair contract terms legislation, see: Jeannie Paterson, ‘The Australian Unfair Contract Terms Law: The Rise of Substantive Unfairness as a Ground for Review of Standard Form Consumer Contracts’ (2009) 33 Melbourne University Law Review 934. 180 Consumer and Competition Act 2010 (Cth) Sch 2 s 23(1)(b). 181 Consumer and Competition Act 2010 (Cth) Sch 2 ss 23(1), 28 (outlining the exclusions).

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largely procedural ‘transparency’ element of the inquiry 183 remains contested,184 the legislature appears to have envisaged that transparency could not overcome ‘underlying unfairness’185 of a contractual term. On the other hand, the ‘core terms of the contract’ are excluded from determination. The ‘core’ terms are those ‘defining the subject matter of the contract’186 and ‘setting the upfront price.’187 The latter provisions foster consumer choice by allowing consumers the freedom to purchase what is plainly on offer.188 In the context of a provision of wide application it is feasible to assume, as the Productivity Commission (‘PC’) report had, that consumers are generally free to avoid unfair prices. However the PC report adds that this is so ‘[u]nless there are major barriers to effective competition.’ 189 Despite the inquiry depending upon largely individual circumstances, when a term is declared void and is subsequently used by a trader, causing a class of persons, otherwise not party to the initial transaction, to suffer loss, the regulator may apply to the court for an appropriate order.190 As a result, the reform clearly holds the potential to incrementally instill consumer participation on a case-by-case basis, while at the same time preserving consumer freedom and choice through its individualised nature.

However, given the specific nature of the disempowered payday lending consumer demographic and their lack of access to justice together with the specific nature of their grievance, a broad-brush approach, which considers a multiplicity of factors applicable to a variety of consumer markets, is arguably

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!182 Consumer and Competition Act 2010 (Cth) Sch 2 s 24. 183 Consumer and Competition Act 2010 (Cth) Sch 2 s 24(3). 184 Chris Willett, ‘The Functions of Transparency in Regulating Contract Terms: UK and Australian Approaches’ (2011) 60(2) International and Comparative Law Quarterly 355; Chris Willett, ‘General Clauses and the Competing Ethics of European Consumer Law in the UK’ (2012) 71(1) Cambridge Law Journal 412; Elizabeth MacDonald, ‘The Core Terms From The Fairness Test in Unfair Terms Legislation’ (2012) 29 Journal of Contract Law 121. 185 Supplementary Explanatory Memorandum, Trade Practices Amendment (Australian Consumer Law) Bill 2009, [5.39]. 186 Consumer and Competition Act 2010 (Cth) Sch 2 s 26(1)(a). 187 Consumer and Competition Act 2010 (Cth) Sch 2 ss 26(1)(b), 26(2) (Excluding indirect pricing such as contingency fees). 188 Supplementary Explanatory Memorandum, Trade Practices Amendment (Australian Consumer Law) Bill 2009 [5.59] – [5.61]; Productivity Commission, Review of Australian Consumer Policy Framework (May 2008, Vol 2) [161]–[162]. 189 Productivity Commission, Review of Australian Consumer Policy Framework (May 2008, Vol 2) [161]–[162]. (emphasis added) 190 Consumer and Competition Act 2010 (Cth) Sch 2 s 239(1) (However damages are excluded).

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ill-suited. The preexisting approaches, which have applied to general consumer credit markets, as well as the payday lending market, illustrate this point.

B Shortcomings of the Preexisting Nuanced Approaches to Consumer Credit Regulation191

Consumer credit laws predating the recent NCCPA amendments have utilised ‘nuanced’ methods towards consumer empowerment in the payday consumer market. However, the particular nature of the payday lending market has rendered these approaches ineffective. The previous regime had consisted of the Uniform Credit Law Agreement 1993 (‘UCCC’),192 which was replaced in 2010 by schedule one of the NCCPA, the National Credit Code (‘NCC’).193 The NCC has reenacted remedies for unjust transactions and unconscionable conduct from the previous regime. The ‘unjust transactions’ provisions allow the court to ‘re-open’ a credit transaction where the conduct in questions exhibits unjust qualities, which are defined to include ‘unconscionability, harshness and oppression.’ 194 The injustice can stem from substantive qualities of the financial contract,195 such as whether the creditor knew or could ascertain with reasonable inquiry that the debtor will not be able to repay without substantial hardship,196 whether the terms are unreasonable and unjustified in light of the risk taken by the creditor,197 the terms of comparable credit products 198 and any other matter the court deems

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!191 A similar, although slightly narrower, prohibition against unconscionable conduct in credit financial services also exists: Australian Securities and Investment Commission Act 2001 (Cth) s 12CB. The provision excludes considerations of whether the loan agreement is likely to cause hardship and whether the creditor was or ought to have been aware of the potential to cause the hardship. As such unconscionability under the ASIC Act remains the narrower option. For a broader discussion on the limits of this approach, see: Kowalczuk v Accom Finance Pty Ltd (2008) 77 NSWLR 205 [216]. 192 Consumer Credit (Queensland) Act 1994 (Qld). The previous exemption granted to loans of less than sixty-two days, was limited restricted to loans where the fees and charges did not exceed five per cent of the total amount of the loan, and the interest rate did not exceed twenty-four per cent: Consumer Credit (Queensland) Amendment Act 2001 s 7(1); Queensland Office of Fair Trading, Payday Lending – A Report to the Minister of Fair Trading (Queensland Government, 2000) iii. 193 National Consumer Credit Protection Act 2009 (Cth) Sch 1. 194 National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 76(8). 195 National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 76(2). 196 National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 76(2)(l). 197 National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 76(2)(m). 198 National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 76(2)(n).

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relevant.199 A ‘reopening’ of the credit contract enables the court to order a range of remedies to achieve a just outcome.200 Importantly, however, the court cannot reduce the principal sum owed by the borrower.201 In more depth, Cash Solutions (Aust) Pty Ltd v Turner202 illustrates the operation of the provisions. In that case the court had found that loans varying from $2 000 to $5 000 made to a mother and son, on an interest rate of 204% per annum,203 and security over the son’s vehicle, was an unjust transaction under the Act. There the court held that the interest rate was not reflective of the risk the lender had undertaken with these particular clients. The interest rate was lowered to forty-eight per cent, this being the rate employed in comparable state jurisdictions at the time.204 However, the court had made it clear that the interest rate itself would not be enough to ground an ‘unjust transaction’ action. Instead, the court was persuaded by the fact that there was no negotiation with respect to the interest rate payable and that the son had already lost his car pursuant to the loan security agreement.205 The challenging nature of payday lending has rendered the nuanced and individualised legislative responses ineffective in two important respects. Firstly, the preexisting provisions have given rise to a limited number of cases, which have had little to no impact on widespread payday lending price structures and methods. 206 It has been suggested that this could be attributable to the ‘individualised’ and nuanced nature of the law and the court’s inquiry, which has limited application to other individual

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!199 National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 76(2)(o). 200 National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 77. 201 National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 74(2). 202 [2008] QDC 108 (note the case was decided under the UCCC equivalents to the National Consumer Credit Protection Act 2009 (Cth) Sch 1 (‘NCC’) unjust provisions). 203 Cash Solutions (Aust) Pty Ltd v Turner [2008] QDC 108 [6]. 204 Cash Solutions (Aust) Pty Ltd v Turner [2008] QDC 108 [33]. 205 Cash Solutions (Aust) Pty Ltd v Turner [2008] QDC 108. 206 See also: Silvey v Hadeler [2008] SADC 64 (where the court accepted the plaintiff’s version that she had paid at least $3 200 on a loan of $2 500. This had the effect of imposing a 37% APR. The court ruled that on the basis of the high APR and repayments made, the borrower was absolved from further payments). Cases involving the provisions on higher loan rates include: Australian Capital Providers Pty Ltd v Wakelin [2009] QSC 167; Kowalczuk v Accom Finance Pty Ltd [2008] 77 NSWLR 205; Galandriel Lothlorien Pty Ltd v Station 1 Pty Ltd [2008] NSWSC 91.

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circumstances.207 In addition to this, however, payday consumers lack the financial resources to undertake a significant quantity of legal action so as to cause a widespread industry impact.208 The lack of access to justice continues to be problematic despite the fact that since 2010 the NCC has enabled industry regulator, ASIC, to undertake actions for an individual or a class of lenders affected by a credit contract with respect to hardship provisions.209 ASIC is significantly hindered by a lack of resources, failing to meet the demand for its regulatory and enforcement tasks.210 The Office of Fair Trading (‘OFT’) in the United Kingdom, on the other hand, offer a better example of effective consumer law enforcement.211 The bodies have successfully regulated the business models of credit providers through licensing and enforcement regimes.212 Although subject to its own critics, the OFT has been referred to as a ‘bargaining agent’ for consumers, by directly negotiating with industry in order to reach better collective outcomes for consumers.213 In this respect, the OFT has managed to reach mutually beneficial outcomes, for both consumer and industry, by ultimately benefitting both consumers and supply-side efficiency. 214 These matters raise some potential concerns regarding the current licensing provisions. The paper will evaluate the current reform’s attempt under ‘Empowerment Through Creditor Responsibilisation.’ Secondly, under the preexisting regimes, the price of the loans is either afforded little weight (in the case of ‘unjust transactions’) or is not challengeable at all (in the case of ‘unfair contractual terms’). The unjust transactions cases have emphasised the need to introduce to something more, in addition to the credit fees charged to ground a successful action.215 The

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!207 Gillam above n 82, 173 (has observed that individual cases have not had an impact on industry practice). 208 Hazel Genn, Paths to Justice: What People Do and Think About Going to Law (Hart Publishing 1999) 101. 209 Regulatory Impact Statement for SL 2007 No 302 (Consumer Credit (Bill Facilities) Amendment Regulation (No 1) 2007 (Qld)) made under the Consumer Credit (Queensland) Act 1994 (Qld) 6-7. 210 Evan Jones, ‘The Crisis and the Australian Financial Sector’ (2009) 64 Journal of Australian Political Economy 91, 109-110. 211 Unfair Terms in Consumer Contracts Regulations 1998 (UK) reg 10. 212 Ramsay and Williams above n 52, 239. 213 Ramsay above n 58, 357. 214 Ramsay above n 58, 359 (Ramsay refers to the OFT’s negotiations and the responses from the mobile phone industry representatives). 215 Director of Consumer Affairs v City Finance Loans (Credit) [2005] VCAT 1989 (30

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courts have upheld this stringent approach even where it can be established that the rates charged are unnecessary for the protection of the lender’s interest.216 The method of affording no particular consideration more weight than the others, fails to address the common payday borrower circumstances where the establishment fee charged, and the consequent debt spiral, forms the sole grievance. Commentators have emphasised that it is especially poignant, therefore, that the fees charged remain simply one consideration, out of many. Admittedly, the courts’ application of the unjust transactions provisions reflects a narrow view of the potentially far-reaching provisions.217 Indeed, the shortcoming could perhaps be explained away as a consequence of ingrained judicial skepticism towards altering parties’ contractual terms.218 Either way, the narrow approach is unwarranted in the context of unjust transactions, which unlike their Australian Securities and Investment Commission Act 2001 (Cth),219 counterpart, do not expressly exclude the ‘upfront’ price of credit from consideration.220 The foregoing considerations raise the issue of whether the recent price capping initiatives under the NCCPA are a solution to these mischiefs. In this context, the recent reforms price ceiling will be evaluated in terms of introducing greater consumer participation under ‘Empowerment Through Price Control.’

V RECENT PAYDAY REFORMS TO THE NCCPA

A Empowerment Through ‘Creditor’ Responsibilisation The new ‘responsible lending obligations’ mark a shift towards creditor responsibilisation, whereby the onus of non-compliance with fair lending !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!September 2005). 216 Director of Consumer Affairs v City Finance Loans (Credit) [2005] VCAT 1989 (30 September 2005) [31]-[32]. (emphasis added). 217 Howell above n 90, 9. 218 The courts have traditionally employed a highly procedural approach to unjust contracts legislation, generally: TM Carlin, “The Contracts Review Act 1980 (NSW) – 20 Years On” (2001) 23 Sydney Law Review 125, 133. 219 A consumer contract in this context refers to a credit arrangement made for the purposes of financing household and personal items: Australian Securities and Investment Commission Act 2001 (Cth) s 12BF(3). 220 Australian Securities and Investment Commission Act 2001 (Cth) s 12BI. This prohibition will most likely urge credit providers to disclose clearly the cost of their credit product, in order to gain benefit from the exemption: McGill above n 83, 159. However, the recent amendments do allow ASIC to seek a court declaration, which has wider application to similar unfair terms in the market, in addition to the individual matter before the court. This could be the one additional benefit the legislation offers to the preexisting legislative matrix: Australian Securities and Investment Commission Act 2001 (Cth) s 12GND(1).

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norms is placed upon the lender.221 Embedded within a licensing regime, responsible lending laws help mend the disjuncture between consumer rights and their enforcement, by directly restricting market practices. Chapter 3 of the NCCPA provides for ‘responsible lending obligations,’ which apply to a ‘credit consumer’222 regarding the provision of credit or regarding the process for seeking to enter into a ‘credit contract.’223 The purpose behind these amendments is twofold; namely, to ensure that prospective customers are not only provided with adequate information but also to ensure that they do not enter into unsuitable contracts. 224 To this end, ‘credit providers,’ 225 who engage in a ‘credit activity’ must hold an ‘Australian Credit License.’ The licensees must follow several obligations including the provision of adequate disclosure through the aforementioned ‘credit guides.’226 The licensees must also make reasonable inquiries ninety days before the provision of credit or credit assistance, concerning the consumers’ objectives and the particular credit product’s suitability to the consumer’s financial position.227 Credit must not be provided where the provider finds that the product is ‘unsuitable.’228 Credit will be unsuitable where, at the time of assessment, either: the borrower will not be able to comply with the credit obligations without ‘substantial hardship’ or circumstances will arise in the regulations that render the contract unsuitable.229 Substantial hardship in this context refers to hardship that is ‘severe suffering, privation […] a condition that bears hard upon one’ causing severe toil and need. 230 An indicator of ‘substantial

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!221 Therese Wilson, ‘The Responsible Lending Response’ in Therese Wilson (ed) International Responses to Issues of Credit and Over-Indebtedness in the Wake of Crisis (Ashgate, 2013) 128. 222 Defined to mean a natural person or a strata corporation: National Consumer Credit Protection Act 2009 (Cth) s 5. 223 Defined to mean ‘a contract under which credit is or may be provided’: National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 4. These provisions took effect on 1st January 2011 (for banks, other authorised deposit making institutions and registered financial corporations), other lenders and brokers were regulated from the 1st July 2010. 224 National Consumer Credit Protection Act 2009 (Cth) s 111. 225 National Consumer Credit Protection Act 2009 (Cth) s 6 (credit providers are defined broadly), s 7 (include ‘credit services’), s 8 (and ‘credit assistance’). 226 National Consumer Credit Protection Act 2009 (Cth) s 113 (applies to providers of ‘credit assistance’) s 126 (applies to ‘credit providers’). 227 National Consumer Credit Protection Act 2009 (Cth) s 117 (credit assistance providers), s 130 credit providers. 228 National Consumer Credit Protection Act 2009 (Cth) ss 118, 119, 131. Silberman v Citigroup Pty Ltd [2011] VSC 514. 229 National Consumer Credit Protection Act 2009 (Cth) ss 118, 119, 131.

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hardship’ can be determined according to recognised poverty benchmarks such as the Henderson Poverty Index,231 whether the borrower will be able to keep repayments after the expiration of ‘teaser rates’232 and whether the borrower has pledged to the creditor that he or she will reduce borrowing on inessential items. 233 This allows the creditor to consider not only the borrower’s formal financial position, as identified by their employment income, but also outgoing expenses, which would otherwise be left unconsidered.234 However, whether or not credit is ‘suitable’ for a prospective borrower can negate an otherwise satisfactory hardship finding. Suitability falls to be decided according to the borrower’s individual circumstances, requiring reasonable inquiries in relation to the borrower’s purpose, the purpose itself, rates, terms and types of the loan that suit the borrower, a part from the loans that are offered by that particular creditor.235 The lender may compare its products’ suitability to the wider range of products available in the market, to this effect.236 Where the factual circumstances of the customer near the ‘pay day loan’ scenario, the provisions become more prescriptive.237 Under a ‘small amount credit contract’ comprising of a term of loan of sixteen days to a year, for the unsecured amount of two-thousand dollars or less,238 it is presumed that the customer cannot fulfill the obligations of the loan without hardship, where the customer is either, at the time of the preliminary assessment, in default under a small amount credit contract or the person has been a debtor under two or more small amount credit contracts, ninety days prior to the preliminary

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!230 Silberman v Citigroup Pty Ltd [2011] VSC 514 [11]. (While the prefix ‘substantial’ is intended to convey something more than ‘mere’ hardship) 231 ASIC, Credit Licensing: Responsible Lending Conduct (Regulatory Guide 209, March 2011) [209.66]. 232 ASIC, Credit Licensing: Responsible Lending Conduct (Regulatory Guide 209, March 2011) [209.63]. 233 ASIC, Credit Licensing: Responsible Lending Conduct (Regulatory Guide 209, March 2011) [209.65]. 234 King and Parrish above n 81, 16. 235 National Consumer Credit Protection Bill 2009, Explanatory Memorandum [3.68]. 236 ASIC, Credit Licensing: Responsible Lending Conduct (Regulatory Guide 209, March 2011) [209.506]. 237 The author compares the recent interest rate caps of 48% imposed upon typical loan products to exclude all loans which feature an annual cost rate over the specified 48%: National Consumer Credit Protection Act 2009 (Cth) Sch 1 ss 32A, 32B. 238 National Consumer Credit Protection Act 2009 (Cth) s 5(1).

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assessment.239 The provider of small amount credit contracts must, when assessing loan suitability, consider the account statement of the previous ninety days.240 Lenders have a duty to assess, and indeed verify the borrower’s financial situation. 241 The provisions therefore paternalistically guard against the borrower’s behavioral propensity to be untruthful in order to gain credit to fuel consumption.242 In similar vein, a creditor may be held liable to pay compensation where the borrower has provided misleading and deceptive statements, on the basis that the creditor has failed to verify the truth of the statements provided.243 Further in this connection, a consumer’s declaration that the loan is for a commercial purpose will not absolve the creditor from NCCPA’s provisions, where the creditor knew or had reason to believe, or would have discovered had reasonable inquiries been made that the loan was intended for NCCPA purposes.244 At a broader level, the foregoing provisions address consumer disempowerment, by targeting consumer weaknesses, both economic and behavioral, on an individualised case-by-case, basis. However, the recent

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!239 National Consumer Credit Protection Act 2009 (Cth) s 118(3A). Interestingly, a potential loophole exists where the borrower is part of a household under two or more of such loans: Banks et al above n 97, 6. Cf. For typical loans any attempt for refinancing existing contracts ensures that where refinancing is not advisable the borrower should be refused the loan and directed to seek recourse through private means under the justice and hardship provisions, considered above: National Consumer Credit Protection Act 2009 (Cth) s 124(7). 240 If the prospective borrower holds an account with an ADI, in which their income is transferred: National Consumer Credit Protection Act 2009 (Cth) s 111(7), 130(1A). 241 National Consumer Credit Protection Act 2009 (Cth) ss 117(1)(b)-(c), 130(1)(b)-(c). The ‘ASIC Guide 209’ envisages that a bank may verify the customer’s situation, without receiving direct information from the customer. Although the ASIC guide also warns that banking information may not provide a full picture for the purposes of making the ‘suitability’ determination: ASIC, Credit Licensing: Responsible Lending Conduct (Regulatory Guide 209, March 2011) [209.40]. Cf. Masiano v Car and Home Finance Pty Ltd (Credit) [2005] VCAT 1755 (12 August 2005) (which demonstrates the tribunal’s reluctance to impose upon the lender any obligations to verify the borrower’s financial situation, under the previous regime). 242 The borrower’s incentive to present untruthful information at times of economic desperation is a well-documented tactic, see for example: King and Parrish above n 81, 13. 243 National Consumer Credit Protection Bill 2009, Revised Explanatory Memorandum, [4.92]. However, the consumer would be subjected to an offense under the NCC for providing a false statement: National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 154. Any compensation used to compensate the errant consumer can be deducted to mitigate the fact that they have provided a misleading statement: National Consumer Credit Protection Bill 2009, Explanatory Memorandum [3.77]-[3.79]. 244 National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 13(3).

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amendments mark a shift away from the pre-existing private remedies available to consumers, to a system of norms directly enforced upon lenders through a licensing regime. The emphasis is on whether the credit product is ‘suitable’ in comparison to other products on the market, as well as the particular consumers’ individual financial circumstances. The advantage of these provisions lies in part in their contextualised nature, which requires both credit product suitability and the potential for hardship to be assessed on a case-by-case basis. The suitability provisions also mirror the rhetoric behind ACL’s statutory consumer guarantees with respect to typical consumer goods and services245 by ensuring that each credit product is ‘fit’ and ‘suitable’ for its intended purpose. The small amount contract provisions potentially address ‘roll-overs’ and debt spirals, by presuming that borrowers who have recently utilised the payday loan cannot fulfill the loan obligations without hardship. This could prove as a catalyst towards inspiring greater competition amongst payday providers to offer either more affordable loan options with a move away from the ‘sweat box’ tactic business model. To use a contrast, the US Dodd-Frank Act, which applies exclusively to home loans, requires the lenders to merely assess the consumers’ ability to repay the loan.246 The US approach is potentially more hazardous as it fails to consider whether, despite inabilities to repay, the loan is nevertheless ‘suitable’ to that particular consumer.247 At the same time the ‘ability to repay’ assessment, is determined according to debt-to-income ratios, which offer mathematical standards of assessment and provide ‘safety harbors’ to complying lenders. 248 Wilson comments that lenders could prove too risk averse, at the expense of financial inclusion of some borrowers.249 By relying on mathematical assessments in order to gain benefit from the safety harbors, the providers potentially exclude some borrowers who could otherwise prove to be suitable customers.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!245 Fitness for purpose, for example: Consumer and Competition Act 2010 (Cth) Sch 2 ss 55, 61. Gail Pearson, ‘Reading Suitability against Fitness for Purpose – the Evolution of a Rule’ (2010) 32 Sydney Law Review 311, 314, 334. 246 Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 §1411. 247 This position was expressly rejected by the US legislators, see further: John Patrow, ‘Ability to Repay’ University of Michigan Law School Public Law and Legal Theory Working Paper No 237 (May 2011) <http://ssrn.com/abstract=1844570>. 248 Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 §1412. 249 Therese Wilson, ‘The Responsible Lending Response’ in Therese Wilson (ed) International Responses to Issues of Credit and Over-Indebtedness in the Wake of Crisis (Ashgate, 2013) 117.

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The penalty provisions and strict licensing requirements further emphasise that the focus is on ‘responsibilising’ the creditor, rather than the borrower, thus plainly diverging from the ‘thin’ concept of consumer sovereignty.250 In this regard, ASIC possesses the administrative powers to cancel licences in the event of non-compliance with the new lending norms.251 Nevertheless, the new regime does not address ASIC’s inability to address enforcement issues due to a growing lack of resources. This problem is exacerbated amid recent reports that ASIC has proved too reluctant to react to reports of industry contraventions of the responsible lending regime. 252 This remains a significant hindrance, which could significantly undermine the effectiveness of an otherwise proactive reform.

B Empowerment Through Price Ceilings Given the prior shortcoming of an individualised approach, the reforms have also addressed payday market concerns in a ‘decontextualised’ manner, by employing price ceilings. In so doing, the legislature has assumed ‘that the community should not support the provision of loans above a particular cost point.’253 Mainstream or typical loan products are ‘capped’ at forty-eight per cent per annum, a price ceiling substantially above the current interest rates charged such that it proves to be of little consequence to the mainstream market.254 ‘Small amount credit contract establishment fees,’255 on the other hand, are capped at a maximum of twenty per cent per establishment fee in

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!250 For instance a licensee’s failure to assess borrower suitability can results in a civil penalty, these penalties range from $AUD 220 000 for individuals and $AUD 1.1 million for corporate bodies: ss 128, 130, 131. 251 The court may also, in the event of an application by ASIC or an aggrieved borrower, issue an appropriate remedy pursuant to Chapter 4 of the NCCPA. The remedies available include injunctions, compensation and civil penalties, amongst others: National Consumer Credit Protection Act 2009 (Cth) ss 177 (injunction), 178, 179 (damages), 184 (although preference is afforded to damages for consumers, s 181). 252 Therese Wilson, ‘The Responsible Lending Response’ in Therese Wilson (ed) International Responses to Issues of Credit and Over-Indebtedness in the Wake of Crisis (Ashgate, 2013). 115. ASIC, Review of Microlenders’ Responsible Lending Conduct and Disclosure (ASIC November 2011). 253 McGill above n 83, 168. 254 Howell et al above n 90, 114. (emphasis added) 255 While ‘short-term credit contracts’ defined as contracts comprising of a term of loan of fifteen days or less for the unsecured amount of two thousand dollars or less, are effectively banned: National Consumer Credit Protection Act 2009 (Cth) s 124A(1).

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addition to the initial loan sum borrowed.256 While monthly fees and fees chargeable upon default are similarly capped.257 Nevertheless, the legislature has been wary of the need to achieve ‘the right balance between allowing a viable and regulated credit industry to provide consumers in need and at the same time providing safeguards to protect the interests of […] consumers.’258 As such, the new price ceilings reflect payday industry concerns that the previous ‘all-inclusive’ ceiling mechanisms, adopted by some state jurisdictions, of forty-eight per cent per annum were commercially unviable and served to unduly restrict the payday industry.259 As a response to these concerns, the original Enhancements Bill was amended to reflect an increase in the allowable establishment fee, from ten percent to twenty per cent.260 The current ceilings have been praised for taking on an ‘all-inclusive’ character as a means of preventing ‘evasion tactics’ commonly employed by the payday lending industry. 261 Under the previous state-based regimes,

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!256 National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 204 (defining the ‘adjusted credit amount’). 257 Permitted monthly fee of no more than 4% of the adjusted credit amount (s 31A(3)), permitted default recovery of no more than 200% of the adjusted credit amount (s 39B): National Consumer Credit Protection Act 2009 (Cth) Sch 1. 258 House of Representatives, Parliament of Australia, Parliamentary Debates (Bill Shorten, Minister for Financial Services and Superannuation, 26 June 2012) 71. 259 See for example: NSW: Consumer Credit (New South Wales) Act 1995 (NSW) (responsible for implementing a 48% cap, which still remains in placed today in respect of some credit contracts); Credit (Commonwealth Powers) Act 2010 (NSW) Div 2 (applying to new credit contracts) ss 4, 5(2) (amending the calculation of interest rates to include rates paid to third party brokers). ACT: Justice and Community Safety Legislation Amendment Act 2006 (ACT) (amending legislation responsible for introducing the 48% interest rate ceiling, the cap remains in force today for some credit contracts); Fair Trading (Australian Consumer Law) Act 1992 (ACT) s 63. QLD: Consumer Credit (Queensland) Act 1994 (Qld) s 14 (restricted credit contracts under the cap of 48%). National Australia Bank, Do You Really Want to Hurt Me? Exploring the Costs of Fringe Lending—A Report on the NAB Small Loans Pilot (National Australia Bank, 2010) 13 (which suggests that the small loans industry cannot make a profit at a 48% pa price ceiling). Cf. Vic: Consumer Credit (Victoria) Act 1995 (Vic) ss 39, 40 (which imposes a 48% interest cap, which is not inclusive of other charges imposed). See also: Director of Consumer Affairs Victoria v City Finance Loans [2005] VCAT 1982 [23] (the decision highlights the wide loopholes which exist in a non-inclusive system of credit rate caps). 260 Parliamentary Joint Committee on Corporations and Financial Services. In particular the previous state regimes in NSW, Qld and ACT, have been criticised by the small loans and lending industry on the basis that 48% pa was not a sustainable price ceiling: National Financial Services Federation, Submission on the Green Paper: National Credit Reform, Enhancing Confidence and Fairness in Australia’s Credit Law (National Financial Services Foundation, 2010) 20-21. 261 Exploitation of legal loopholes is prevalent in this market: Parliamentary Joint Committee on corporations and Financial Services, Parliament of Australia, Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (Proof Committee Hansard, 24 August 2011) 26-27.

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lenders have been able to avoid price ceilings by imposing charges payable to third parties, such as brokers, 262 or fashioning ‘sham’ pawn broking transactions,263 Howell comments that the wide-ranging nature of the present caps is indeed likely to prevent evasion tactics.264 An outright restriction on loans above a certain cost point adds rigor the foregoing responsible lending provisions, while alleviating the effects of ASIC’s inability to effectively react to industry contraventions.

C Potentially Workable, But Incomplete The ancient practice of price control in credit contracts is met with a deep rooted and similarly ancient skepticism.265 Proponents of the traditional ‘thin’ consumer sovereignty concept and economists alike, argue that price ceilings reduce supply, increase the barriers to entry, and therefore decrease competition.266 On the other hand, deregulation promises competition and allows consumers to rationally resolve their financial problems. 267 These arguments against a decontextualised approach are found wanting. Plainly, the payday lending market is not a well-functioning market as it lacks competition. Studies confirm that lenders charge the highest rates permissible in their jurisdiction, rendering the assumed status of consumer as ‘sovereign’ obsolete.268 Further, payday loan avenues exacerbate the preexisting financial exclusion of their borrowing demographic,269 who exercise this measure on a ‘last resort’ basis, lacking real ‘freedom of choice.’270 Indeed, this approach would bolster the need for government intervention, as currently the lender remains the only sovereign party.271

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!262 Howell above n 104, 322. National Consumer Credit Protection Act 2009 (Cth) Sch 1 s 122 (now prevents a credit assistant from profiting from a payment made to it by a third party, originally from the consumer). 263 Gillam above n 82, 172. 264 Howell above n 104, 323. 265 Durkin above n 104, 821; Peterson above n 80. 266 Durkin above n 104, 827. 267 Ibid 835. This argument was ultimately adopted by the UK government on the topic of consumer loans: Consumer Credit Act 2006 (UK). 268 Howell above n 90, 23. 269 Gillam above n 82, 194-197. 270 Ibid 204. 271 Howell above n 90, 23.

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The more persuasive counterargument to the price ceiling approach questions whether restrictions to payday lending will decrease consumer participation, thereby worsening financial exclusion of some consumer groups. Although demand does not justify supply, does it justify price ceilings, which can potentially reduce consumer market participation through financial exclusion? In this regard, a price ceiling could prove to be a ‘blunt instrument,’ hurting the ‘most low-income consumers who are often the intended beneficiaries.’272 Undeniably, price regulation is an imprecise science and is potentially harmful to both lender businesses and consumers.273 Indeed, removing payday lending does not relieve payday consumers from structural inequities, which encourage the borrowing practices in the first place.274 The potential of the present reform’s price ceilings to reduce access to credit is unduly limiting. It goes over and beyond the empowering approach envisaged by the thicker conception of consumer sovereignty to potentially hinder consumer choice, leading to an undesired situation of state-sanctioned financial exclusion.275 In this way, the decontextualised approach remains an incomplete response. Albeit, in some ways, the decontextualised approach may prove to be an advantage, if the reforms help incentivise alternative lending practices.276 Alternative lending practices (especially non-for-profit organisations) lack the profit-driven zeal of their private counterparts and sufficient capital resources to effectively cater to the payday market.277 However, it has been observed that government restrictions on payday lending indirectly encourage alternative lending practices, by ensuring that their private counterparts do

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!272 Iain Ramsay, ‘To Heap Distress Upon Distress: Comparative Reflections on Interest Rate Ceilings’ (2010) 60 University of Toronto Law Journal 707, 710-711. From a practical perspective it is anticipated that a significant restriction in the payday lending market could give rise to illegal, ‘black market’ outlets. Although comparative studies in this field show that similar jurisdictions have not experienced this consequence: Gillam above n 82, 190. 273 D Cayne and M Trebilcock, 'Market Considerations in the Formulation of Consumer Protection Policy' (1973) 23 University of Toronto Law Journal 396; McGill et al above n 83, 164. 274 Howell above n 130, 220. 275 Cf. King and Parrish above n 81, 18 (who argue that a price ceiling is the superior methods towards curtailing abusive payday lending practices). 276 S Ben-Ishai, Regulating Payday Lenders in Canada: Drawing on American Lessons (CLPE Research Paper, Osgoode Hall Law School, Toronto, 2008) 32-33. (emphasis added). 277 Peterson above n 80, 837.

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not ‘stifle’ alternative avenues in their ‘infancy.’278 Government incentives and assistance to alternative forms of lending could bring forth an effective injection of market competition. The existence of a ‘fairer’ lending alternative, such as the Brotherhood of St Laurence, demonstrates that it is not only economically possible to operate a fairer lending scheme but similarly, such schemes present healthy competition towards the payday lending market. In 2006, for example, the ANZ bank had trialed a ‘progress loan’ program in conjunction with Brotherhood of St Laurence. The program offered loans at 12.7% interest rates to select vulnerable consumers who could not otherwise obtain credit from the mainstream avenues.279 Clearly, supporting alternative lending options fosters a precise approach to an uncompetitive consumer lending market, without the prospect of replacing financial exclusion with state-sanctioned financial exclusion. In this way, consumers will be offered viable market alternatives, while at the same time, payday lenders will be coerced by the increasingly regulated, empowered consumer, to offer viable lending alternatives. Therefore, a decrease in the prototypical payday loan could lead to an increase in alternative financial products, catering to the vulnerable consumer.280 In addition, a positive long-term consequence of the reform could be that consumers will be prompted to seek more viable alternatives at times of hardship.281

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!278 Ibid 837-838. 279 ANZ and Brotherhood of St Laurence, ANZ and Brotherhood of St Laurence Team up to Offer Small Loans for people on low incomes (2006) <http://www.bsl.org.au/main.asp?PageId=3935>. In the US context, the North Carolina State Employee’s Credit Union (SECU) provides another example. The SECU has offered eligible members a ‘salary advance loan’ (SALO). Most SALO customers are economically vulnerable and fell within the subprime credit risk category. Overall the program has featured low delinquency rates. While at the same time, the program sought to eradicate structural problems underlying the borrowers economic situations by requiring that 5% of the SALO be deposited in a new member bank account: Michael A Stegman above n 137, 183-4. The National Australia Bank and the Good Shepherd Finance Program provide an additional example. The program, which operates on low-interest and no-interest repayment methods, has risen by eighty-four per cent in twelve months in the space of a twelve-month observation period, February 2011- 2012: Banks et al above n 97, 89. 280 Howell above n 130, 222. 281 Howell above n 104, 333. The Centre for Responsible Lending observes, the states, which impose a comprehensive, cap on costs of a payday loan at around 36% ‘have solved the debt trap problem by realising a saving of USD $1.5 billion for their citizens.’ While caps have had a positive impact on would-be borrowers from North Carolina: King and Parrish above n 81, 19-20.

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However, without direct legislative reform aimed at financial exclusion,282 these market projections are mere conjecture. A more proactive, enabling reform could include a legislatively supported lending alternative.283 The US context provides a good example, in this regard. The US legislature has encouraged mainstream lenders to provide safer alternatives to vulnerable borrowers, through the Consumer Reinvestment Act 1977 (‘CRA’). The Act seeks to incentivise mainstream providers to ‘serve the credit needs of their entire communities, including low and moderate income neighborhoods.’284 Compliance with the Act requires the lender to provide small loans, typically offered by payday lenders, at lower interest rates, a reduction of principal in addition to financial counseling to the borrower.285 In exchange the loan provider receives a good ‘CRA rating,’ whereas a poor rating affects a bank’s application for mergers and acquisitions, approval processes for opening and closing branches and the ability to expand business endeavors. 286 The initiative has had positive results in terms of allowing mainstream lending institutions to pose competition to typical payday providers.287 Importantly, the initiative reaffirms that it is possible to provide more competitive, profitable products to vulnerable consumers. 288 Similarly, Australian commentators have urged for proactive policies to assist market competition by offering high-risk lenders viable market alternatives.289 Malbon comments that although at first blush ‘it may seem inappropriate for governments to provide incentives to investors,’ the approach makes ‘perfect sense’ by adding further armory to the preexisting campaigns against unfair lending

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!282 Howell above n 130, 212-213. 283 Banks et al above n 97, 86-88. 284 W Apgar and M Duda, ‘The Twenty-Fifth Anniversary of the Community Reinvestment Act: Past Accomplishments and Future Regulatory Challenges’ 9 (2003) Economic Policy Review – Federal Reserve Bank of New York 169, 169. 285 Center for Responsible Lending, ‘FDIC Pushes for Affordable Loans: Regulator Offers CRA Incentive for 36% Interest Rate Cap and Other Measures,’ Center for Responsible Lending NewsBrief 2007. 286 M Barr, ‘Credit Where it Counts: The Community Reinvestment Act and Its Critics’ 75 (2005) New York University Law Review 101, 115. 287 Apgar and Duda above n 284. 288 Quoting several findings in this respect: Barr above n 286, 167. 289 See for example: Banks et al above n 97, 84- 89. Other proactive policy measures could include increased welfare support through pre-existing welfare payments: ACOSS, Who is missing out? Material deprivation and income support payments (Australian Council of Social Services, Strawberry Hills, 2012) 3.

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practices.290 In some sense, a standards-based regulatory model espoused by the CRA, conforms to the regulatory approaches adopted in the context of consumer-safety setting by public authorities and is less restrictive than a decontextualised rules-based approach. 291 Without such initiatives, the preexisting armory leaves open the possibility of state-sanctioned financial exclusion, at the expense of greater financial inclusion. Consequently, at least in some respects, the legislation appears to have ‘missed the point’ in its incompleteness. To conclude, the paper has considered the recent NCCPA, within a broader framework of ‘consumer sovereignty.’ By unpacking the meaning of consumer sovereignty, as a concept capable of dual classification, the paper has urged the need to preserve the end goals of consumer sovereignty through its ‘thicker’ conception. In doing so, the paper has highlighted the shortcomings of the thin approach to consumer sovereignty, through the guise of behavioral economics findings. To this effect, the legislative and common law developments appear to have expanded consumer participation, by judging consumers against their, at times, irrational and powerless standards, in individualised ways typically through ex post private litigation. Although, couched within a more regulatory licensing mechanism, the recent NCCPA ‘responsible lending’ reforms appear to largely follow suit. Even alongside these developments, the payday lending market has managed to preserve its anomalous and seemingly unmanageable nature. It is a proportionately small market, with specific instances of consumer disempowerment and lack of market participation. At first blush, at least, the payday lending market appears to warrant decontextualised market intervention through price ceilings. Indeed, a price ceiling approach has the propensity to add rigor to the foregoing norms of ‘responsible lending.’ While, at the same time, the approach could provide encouragement for market competition through alternative lending practices.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!290 Malbon above n 13, 228. 291 Therese Wilson, ‘Vulnerable and Disadvantaged Consumers’ in in Justin Malbon and Luke Nottage (eds), Consumer Law and Policy in Australia and New Zealand (The Federation Press, 2013) 308.

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However, a deeper understanding of financial inclusion, as the relevant indicator of consumer market participation pointedly questions the decontextualised approach. For, if demand does not justify supply, does demand justify blunt restrictions on supply? A more considered answer would conclude that demand justifies regulated supply of financial services to the financially excluded payday borrowing demographic. While at the same time, a blunt restriction on demand potentially replaces market sanctioned financial exclusion, with legislatively sanctioned financial exclusion.

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FROM KANT TO KOSKENNIEMI: DE-FAMILIARISING LANGUAGE IN INTERNATIONAL LAW

GORDON C. McBAIN

BOND UNIVERSITY

Abstract: This paper begins by briefly discussing the symbiotic relationship that international legal theory shares with international relations theory. Confirming the existence of this relationship is done with a view towards understanding the inter-subjective vocabularies that pervade the discourse within politics and international law. Understanding the social and dialectal undercurrents of international law is beneficial for two reasons. First, it provides a means of further conceptualising the processes and structures that shape the modern international legal system. Second, it generates further techniques to explore the theoretical boundaries of international law. Ultimately, it is concluded that successfully understanding of the role of vocabularies in international legal theory is the next step towards truly appreciating the complex phenomenon that is international law.

*B.IR (Bond), LL.B Candidate (Glasgow); formerly an LL.B Candidate of Bond University.

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I. CONCEPTUALISING INTERNATIONAL LAW

A. The Structuring of International Law International law is a field of study that often invokes fierce debate within legal and political scholarship. Some argue that it is the means with which we might truly realise the goal of universal emancipation. Others dismiss the project entirely, or at the very least view international law with a sense of scepticism or contempt. These perspectives reverberate across every aspect of the discipline, so much so that one might make the argument they have taken on some kind of quasi-religious form, endlessly disputing the validity of the other without true self-reflection. If accepted, the picture presented is a very awkward one indeed. It suggests the past, present and future of international law will always be a story of dogmatism and ultimately, stagnation. Indeed, what other outcome is possible, theoretically or practically, when international law is divided through the middle? International legal theory then, is nothing more than scholastic trench warfare, with each side losing an inch shortly after an inch is gained in the contest for academic supremacy. It is no wonder that international law appears to be in a state of perpetual crisis when the larger picture is considered. This essay proposes that language is the ultimate key in unlocking the complexities of international legal discourse. The methodology supportive of this proposition is threefold. First, this essay will draw upon critical scholarship to define international law in a manner that avoids favouring a realist or liberalist conception of international law. This is done to highlight the foundations upon which this essay’s argument is based. Second, the origins of the realist and liberalist traditions in international law will be considered from a critical perspective. This is done with a view to destabilising entrenched ideas within each tradition. Finally, the constitutive role of knowledge-laden vocabularies in international law will be examined. This is done to prove that international law is ultimately a social phenomenon, and to understand the constitutive social processes of which that phenomenon is composed requires an unfamiliar understanding of the formative role language plays in human behaviour.

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B. Revising International Law The value and capacity of social processes, such as law, to effect change is only valuable so long as we are able to utilise language to construct mutual understanding. International law, like any other facet of political science, is much the same. Given the inflexibility of traditional conceptions of international law, a comprehensive revision of the discipline is necessary. Certainly, such a revision would be reflective of international law’s theoretical origins. Theory finds its origin in the Greek word thea, meaning to make the familiar strange.1 Consequently, what we must do is make international law unfamiliar to ourselves so as to be able to criticise its shortcomings without rose-tinted spectacles. As a consequence of this essay’s critical approach, it is appropriate to highlight the importance of Martti Koskenniemi at this time. His pioneering scholarship has come to epitomise the critical movement within international jurisprudence. I do not propose to give a detailed account of his work here.2 However, what is proposed within this essay is to utilise his means of defining international law and aspects of his methodology in ascertaining its structure. His definition is arguably the most incisive view of the discipline, and is very likely the best foundation for any critical study of international law. In his first book, Koskenniemi described international law as a structure of ‘argumentative moves and positions’. 3 In focussing on the content of argument that passed between international lawyers, Koskenniemi demonstrated an awareness of two things. He demonstrated an appreciation of the role social phenomena play in the structure of the international system. This mirrored a similar trend that was developing within the realm of

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1 See James Der Derian, On Diplomacy (1987, Blackwell), particularly at 30-44. 2 Indeed, it is unlikely that I could do such a task any justice. 3 Martti Koskenniemi, From Apology to Utopia: The Structure of International Legal Argument (1989, Helsinki: Lakimieslitton kustannus) cited in David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press), 106.

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international relations theory at the time.4 Further, he demonstrated an awareness of why critical self-reflection was necessary within his own profession. Indeed, such a reflection is still necessary. In his sequel to From Apology to Utopia, Koskenniemi took a far more critical view of international law.5 In The Gentle Civiliser of Nations, he opined that international law is ‘a particular sensibility, or set of attitudes and preconceptions about matters international’.6 Gentle Civiliser was a historiographical study of Koskenniemi’s view of what modern international law was prior to 1960. It sought to expose how the subjective conditions in which scholars found themselves influenced their arguments on how international law was structured. 7 Further, if Koskenniemi’s definition is read alongside some of his later work, particularly some of his essays in The Politics of International Law,8 the intricate but expansive nature of his definition is clear. A ‘sensibility’ quite easily encompasses the social practices that contribute to the fermentation of shared knowledge. This knowledge then, eventually, manifests itself in the perceived structure of the international legal system. However, what is more incisive about the use of ‘sensibilities’ is their inherent reliance on language to establish mutually constituted knowledge. Sensibilities, when sufficiently developed, encompass the constitutive building blocks of legal discourse, they being vocabularies composed of certain linguistic constructions. Put bluntly, Koskenniemi identifies the international system as one of competing inter-subjective vocabularies, which, ultimately, clash with one

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!4 David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 106. 5 Ibid; see, generally, Martti Koskenniemi, The Gentle Civilizer of Nations: The Rise and Fall of International Law 1870-1960 (2002, Cambridge University Press). 6 Martti Koskenniemi, The Gentle Civilizer of Nations: The Rise and Fall of International Law 1870-1960 (2002, Cambridge University Press) 2. 7 See Martti Koskenniemi, The Gentle Civilizer of Nations: The Rise and Fall of International Law 1870-1960 (2002, Cambridge University Press) 2; see, generally, George Rodrigo Bandeira Galindo ‘Martti Koskenniemi and the Historiographical Turn in International Law’ (2005) 16(3) European Journal of International Law, 539. 8 See, generally, Martti Koskenniemi, The Politics of International Law (2011, Hart Publishing): The Politics of International Law was not a new book in itself, rather, it was a republication of some of Koskenniemi’s essays from throughout his academic career.

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another in an effort to attain epistemic and legal dominance.9 Consequently, the role vocabularies play, and whether they precipitate or perpetuate social processes, must be understood if the transformative effect of those processes is to be properly understood in international legal scholarship. This presents us with a figurative chicken or egg question, which came first, vocabulary or process? This essay seeks to argue that is vocabulary that comes first, and that this is because of the transformative role vocabularies play in the international legal system. In the next section, the manner in which international relations theory overlaps with international jurisprudence will be examined. This is done with a view to demonstrating the inter-disciplinary nature of the competing vocabularies described above. It is not the purpose of the upcoming section to examine the relationship between international law and international relations to the same depth as certain scholars have done.10 Instead, the purpose of the following section is to reveal the existence of social and dialectic undercurrents in both positivism and universalism within international law theory. Once their existence has been confirmed, it is then open to demonstrate why neither tradition is likely to desist from competition with the other.

II. DECONSTRUCTING INTERNATIONAL JURISPRUDENCE

A. International Law and International Relations The following section of this essay will examine two of Martin Wight’s ‘traditions of international thought’, 11 particularly in the context of international jurisprudence. This necessitates a dual analysis of international !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!9 See David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 107: It is this particular facet that defines Koskenniemi as a critical CLT theorist, his ability to mutually accept ‘contradiction and change’ in legal discourse. 10 See, generally, David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press). 11 For an overview on the work of Martin Wight, See Hedley Bull, ‘Martin Wight and the Theory of International Relations: The Second Martin Wight Memorial Lecture’ (1976) 2(2) British Journal of International Studies, 101, 104-105.

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legal theory as well as international relations theory. For reasons that will become clear, this is because international law and international relations are, figuratively speaking, two sides of the same coin. The aim of the following section is to analyse why conflicts in vocabulary occur within the international legal discipline. Following that, it will become clear why neither a realist or liberalist perspective is truly informative when discussing the structure of the international legal system. International legal theory often overlaps with, and indeed mirrors, international relations theory. In this relationship, legal positivism overlaps with realism. Further, Legal Process Theory (LPT), as the legal expression of the rational tradition, significantly resembles liberalism. The former exists within Wight’s realist tradition, the latter within his rationalist tradition. Many scholars have sought to expand upon the importance and depth of this relationship. I do not intend to replicate those studies here. Instead, I propose to utilise aspects of such studies to highlight similar theoretical and dialectic trends to better inform international law.

B. The Realist Tradition and Positivism The first tradition that will be discussed is the realist (or Machiavellian) tradition; it is the more conservative of Wight’s three traditions. What then, might we say are the common characteristics of positivism and realism within the realist tradition? In attempting to answer this question, I propose to demonstrate the utility of language through analysis of one key assumption of the realist tradition. Briefly summarised, this assumption is the preponderance of the State, 12 and its role as the ‘a bordered power container’ within the international system.13 It is through understanding positivism’s obsession with the State and power that we are then able to discern why it fails to assert dominance in international legal discourse.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!12 David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 84, 86-87. 13 Anthony Giddens, ‘The Nation as Power-Container’ in John Hutchinson and Anthony Smith (eds) Nationalism (1994, Oxford University Press), 34, 34-35.

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International law within the realist tradition has often only been considered within the paradigm of Statehood.14 Simply stated, one had to be a subject of international law to command relevance, and to be a subject of international law one had to be a State.15 This position is consistent with the central tenet of realism in international relations theory, namely, that the State is the prime actor within the international system. Indeed, a State-centric perspective is consistent with both orthodox realism, as well as more contemporary and liberal forms of realism, such as the neo-realist tendencies of the English School of International Relations.16 The preoccupation of both disciplines with statehood derives from the same circumstance, the peace of Westphalia in 1648. Westphalia effectively laid the foundation of the modern international system, diplomatically as well as legally, that foundation being State sovereignty.17 If we draw insight from diplomatic theory, we can observe this preoccupation with Statehood and power. For example, Satow defined diplomacy as essentially the conduct of relations between ‘independent’ (and hence sovereign) States.18 Similarly, Bull understood diplomacy to mean the ‘the conduct of relations between sovereign States with standing in world politics by official agents and by

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!14 See, eg, Charter of the United Nations, article 1(2); Covenant of the League of Nations, article 1; For a detailed account of the history of Statehood in International Law, see Antonio Cassese ‘States: Rise and Decline of the Primary Subjects of The International Community’ in Bardo Fassbender & Anne Peters (eds) The Oxford Handbook of The History of International Law (2013, Oxford University Press), 49. 15 James Crawford, Brownlie’s Principles of International Law (8th ed, 2012, Oxford University Press), 4; Stephen Hall, Principles of International Law (3rd ed, 2011, LexisNexis Butterworths), 194-195. 16 For example, whilst Bull and Der Derian’s work on diplomatic culture was pioneering, it was still confined to an analysis that maintained States as being the foremost actor within the international system – see, generally, Hedley Bull, The Anarchical Society – A Study of Order in World Politics (4th ed, 2002, Columbia University Press), 156; James Der Derian, On Diplomacy (1987, Blackwell), particularly at 30-44; for a detailed account of the history of the English School of International Relations – see, generally, Iver Neumann, ‘The English School on Diplomacy’, Discussion Papers In Diplomacy, Netherlands Institute of International Relations ‘Clingendael’, ISSN 1569-2981. 17 See Janne Nijman, ‘Minorities and Majorities’ in Bardo Fassbender & Anne Peters (eds) The Oxford Handbook of The History of International Law (2013, Oxford University Press), 95, 100; Andrew Cooper, Jorge Heine & Ramesh Thakur, ‘Introduction’ in Andrew Cooper, Jorge Heine & Ramesh Thakur (eds), The Oxford Handbook of Modern Diplomacy (2013, Oxford University Press), 1, 4. 18 Ernst Satow, A Guide to Diplomatic Practice (4th ed, 1957, Longmans, Green & Co) 3.

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peaceful means’.19 Crucially, in both orthodox and moderate form, we observe that the sovereign independence and preponderant power of States is foundational assumption of traditional canon in diplomacy and international relations. Sovereignty is explicitly mentioned in each form, while power is subtly monopolised by providing standing only to States to the exclusion of all others.20 The same preoccupation with sovereignty and power is evident in positivist jurisprudence, and is manifest in both an orthodox and moderate perspective. Orthodox positivism does not classify international law as ‘law properly so-called’ due to its lack of coercive force.21 According to strict positivism, no sovereign entity has the power to coerce or impose their will on another sovereign without the consent or compulsion of that sovereign.22 This differs, perhaps significantly, from what I would describe as ‘revisionary positivism’. Revisionary positivism does attribute some normative force to international law.23 For example, Hans Kelsen framed international law as the ‘body of rules’ that ‘regulate the conduct of the States in their intercourse with one another’.24 Diverging from orthodoxy, he took the view that international law did, in fact, form a complete legal system. 25 Kelsen’s perceived system significantly differed from a municipal system however. This is because his system draws its coercive (and hence legal) authority emanated not from the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!19 Hedley Bull, The Anarchical Society – A Study of Order in World Politics (4th ed, 2002, Columbia University Press) 156. 20 See Anthony Giddens, ‘The Nation as Power-Container’ in John Hutchinson and Anthony Smith (eds) Nationalism (1994, Oxford University Press) 35. 21 Essentially, this dismissal of international law derived from the logic and assessment of John Austin, the pioneer of modern legal positivism, who argued that international law, could not be binding because it proposed to regulate sovereigns, which were above coercion. For a detailed account, see Augusto Zimmerman, Western Legal Theory: History, Concepts and Perspectives, (2013, LexisNexis Butterworths), 67-68; See also Dean Acheson described it as an ‘ethical distillation’ not to be confused with law. Similarly, Margaret Thatcher dismissed the concept on account of its perceived limitation on British military power – see David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 13-18. 22 See Thomas Hobbes, Leviathan (1651), Chapter XXVI, 7; Augusto Zimmerman, Western Legal Theory: History, Concepts and Perspectives, (2013, LexisNexis Butterworths) 67-68. 23 See David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 13-18. 24 Hans Kelsen, Principles of International Law (1952, Lawbook Exchange Ltd) 3. 25 Hans Kelsen, General Theory of Law and State (1949, Harvard University Press), 341.

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sovereignty of a ‘leviathan’, but instead from multiple sovereign entities. 26 Consequently, States, in possessing sovereignty, were bound by the responsibility of a grundnorm, a notion that Kelsen described as a positive obligation to obey all other norms.27 The advent of peace at Westphalia gave rise to a vocabulary that has evolved to epitomise the tenets of the realist tradition. It is something we might describe as the ‘vocabulary of sovereignty’. In this vocabulary, the relationship between statehood, power and security is preponderant, absolute, and necessary for the continuance of order.28 From Grotius,29 to Mearshiermer,30 the same ‘vocabulary of sovereignty’ has for centuries developed a shared knowledge of behaviour within the realist tradition.31 This shared knowledge is manifest in the dialect that is continuously recycled in the vocabulary used by scholars (and practitioners) to layer their respective positions. What is crucial to understand about the ‘vocabulary of sovereignty’ however is not that it adds affirmative substance to the notion of sovereignty, but that it’s language is chosen and continuously employed to retain power within the mechanisms of the State and the State system.32 Despite this, the realist tradition cannot account for the diminution of sovereignty, and hence dispersion of power, that has occurred in the latter half of the 20th century.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!26 Hans Kelsen, Pure Theory of Law (1st ed, 1967, University of California Press), 31. 27 Ibid. 28 See Hedley Bull, The Anarchical Society – A Study of Order in World Politics (4th ed, 2002, Columbia University Press) 126; Hans Kelsen, General Theory of Law and State (1949, Harvard University Press) 13-16. 29 See, generally, Hugo Grotius, De Jure Belli Ac Pacis (1625), but particularly at Chapter XV, 817. 30 See, eg, John Mearsheimer, ‘The False Promise of International Institutions’ (1995) 19(3) International Security, 1. 31 For explanation of the constitutive role of ‘shared knowledge’ see Alexander Wendt, ‘Constructing International Politics’ (1995) 20(1) International Security, 71, 74; Alexander Wendt ‘Anarchy is What States Make of It: The Social Construction of Power Politics’ in James Der Derian (ed), International Theory: Critical Investigations (1995, MacMillan), 129, 135-173; Alexander Wendt, Social Theory of International Politics (1999, Cambridge University Press), 139-144. 32 See David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press), 84, 86-87; for an additional discussion of the inherent power politics that transpires within international legal discourse, see, Martti Koskenniemi, The Politics of International Law (2011, Hart Publishing), 112, 331.

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International legal discourse has evolved to a point where it now focuses on managerial ‘regimes’, where technical experts in law, economics, or the environment, now command as much attention as any mechanism of the State. 33 Essentially, the vocabulary that perpetuates and entrenches a traditional conception of sovereignty has been challenged. As a direct result, the reciprocal knowledge that underpins such this vocabulary has also been challenged. Both orthodox and moderate positivism fail to honestly account for the complexity of the international legal system. What compels States to observe Kelsen’s grundnorm? According to orthodox positivism, Kelsen cannot provide a ‘satisfying jurisprudential explanation as to why a nation cannot totally reject international law’.34 So far as the grundnorm is concerned then, the power distribution of the international system does not ‘compel’ observance.35 Further, Hall, a rationalist scholar, points out neither orthodox or moderate positivism can explain pacta sunt servanda, the principle that agreements between States should be observed.36 Such a task is not possible without reference to some form of socially constitutive process. Lauterpacht went further in arguing that ‘pure positivism is self-contradictory for the simple reason that it only takes into account one part of the legal reality’.37 Even if we deconstruct the formative reasoning of rationalist scholars such as Hall and Lauterpacht, there still remains the problem that positivism fails to adequately describe the numerous social processes involved in construction of the international legal system, or even engage with them in its discourse for

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!33 Martti Koskenniemi, The Politics of International Law (2011, Hart Publishing), 320-324; Carlo Focarelli, International Law as a Social Construct (2012, Oxford University Press), 142-150. 34 Louis Henkin, How Nations Behave: Law and Foreign Policy, (Prager, 1968), 85n, cited in David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 14. 35Stephen Hall, ‘The Limits of Legal Positivism’ (2001) 12 European Journal of International Law, 269, 300. 36 Ibid, 301. 37 Hersch Lauterpacht, ‘Kelsen’s Pure Science of Law’ in E. Lauterpacht (ed), International Law: Being the Collected Papers of Hersch Lauterpacht – The Law of Peace, Vol 2(1) (1975, Cambridge University Press), 404, 426.

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that matter. 38 Why then, do ‘pure’ positivist perceptions of international law persist? The answer is language. Law, like all normative sciences, is fundamentally premised not merely on the conflict of ideas, but the vocabularies used to construct and give definition to those ideas.39 Put bluntly then, if the vocabulary employed by positivists continues as it has done, then the shared knowledge that exists within their epistemic community will continue to hold sway and perpetuate the flaws of the realist tradition.

C. The Rationalist Tradition and Liberalism

The second of Wight’s traditions of international politics considered in this essay is the rational tradition.40 The aim of this section is shed light on how the rational tradition views statehood and power in a legal context. In doing so, not only will this section highlight conflicts that exist between the rationalist and realist traditions but also explain why the rationalist tradition is also unlikely to assert near-total dominance over the discipline. Liberal theories of international law aim to present a vocabulary that is intended to be inclusive and prescriptive.41 This is particularly true of Legal Process Theory (LPT). LPT lacks a universal definition. Instead, it is more a ‘collection’ of theories that reach similar conclusions in relation to certain phenomena in the international system, but do so through a liberalist methodology. 42 For example, one interpretation from Judge Roslyn Higgins, formerly of the International Court of Justice, ‘rejects the notion of law merely as the impartial application of rules. International law [from an LPT

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!38 For evidence supporting the existence of these social phenomena, see, generally, Martti Koskenniemi, The Politics of International Law (2011, Hart Publishing); as well as Martti Koskenniemi, The Gentle Civilizer of Nations: The Rise and Fall of International Law 1870-1960 (2002, Cambridge University Press), 2-5; See also, David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 105-110. 39 Martti Koskenniemi, The Politics of International Law (2011, Hart Publishing), 307-308. 40 See Hedley Bull, ‘Martin Wight and the Theory of International Relations: The Second Martin Wight Memorial Lecture’ (1976) 2(2) British Journal of International Studies 104-105. 41 David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 32. 42 See Anne-Marie Slaughter, ‘A Liberal Theory of International Law’ (2000), American Society of International Law - Proceedings of the Annual Meeting, 240.

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standpoint] is the entire decision making process’.43 The vocabulary of the rational tradition, instead of being preoccupied with sovereignty and power politics, focuses on the complex interrelationships that exist above and below the State.44 This is because the language that pervades the various different theories of LPT attempt to shape the international system, without merely ‘describing’ what the international system ‘objectively’ is.45 This places LPT scholars in direct opposition to their positivist counterparts. The vocabulary of the rational tradition seeks to construct an alternate worldview, predicating its foundation on the realisation of individual freedom, as well as national cooperation and interdependency.46 Within the discourse of liberalist political and legal theory, the crucial persistent theme is the rhetoric employed by each to imbue politics and law with a preponderant sense (or sensibility) of morality.47 It is a very different image from that constructed by traditional modes of thought. This may be demonstrated through a similar mode of analysis as that utilised in the previous section on realism. Specifically, this calls for an analysis of sovereignty and power from a rationalist perspective.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!43 Rosalyn Higgins ‘Policy, consideration and the international judicial process’ (1968) International and Comparative Law Quarterly, 17, 58 - cited in David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 93. 44 See, eg, Tim Dunne, ‘Liberalism’ in John Baylis, Steve Smith & Patricia Owens, Globalisation of World Politics: An Introduction to International Relations (4th ed, 2008, Oxford University Press), 110, 111-114; Anne-Marie Slaughter, ‘A Liberal Theory of International Law’ (2000), American Society of International Law - Proceedings of the Annual Meeting, 240, 241; Fernando Tesón, ‘The Kantian Theory of International Law’ (1992) 92(1) Columbia Law Review, 53, 63-64. 45 See David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 93-95. 46 David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 97-99. 47 See, eg, Tim Dunne, ‘Liberalism’ in John Baylis, Steve Smith & Patricia Owens, Globalisation of World Politics: An Introduction to International Relations (4th ed, 2008, Oxford University Press), 110, 111-114; Anne-Marie Slaughter, ‘A Liberal Theory of International Law’ (2000), American Society of International Law - Proceedings of the Annual Meeting, 240, 241; Fernando Tesón, ‘The Kantian Theory of International Law’ (1992) 92(1) Columbia Law Review, 53, 63-64.

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Rationalists treat sovereignty with much less deference than those in the realist tradition. Far from offering absolute protection from intervention for States, the protection of the international system is instead premised on how those States conform to a set of universal values.48 For example, according to Tesón, ‘sovereignty is to be respected only when it is justly exercised’.49 Sovereignty then is a responsibility, as opposed to a right. This position, crucially, removes the interests of the State as the foremost consideration of political and judicial decision making. Indeed, a dominant perception of LPT is that, whilst it may acknowledge the longevity of the State, the State is perceived to be a hindrance rather than a multiplier of cooperation and progress. Within the bounds of LPT, there is a continued tension surrounding the relevance of States. Some argue for a federation of States into a wider polity.50 Alternatively, there are those that posit the State should be confined to the past.51 Additionally, liberalism also embraces pluralism ‘below’ the State. Specifically, it does so by embracing the role of non-State actors and ‘civil society’ in international politics.52 Clearly, if we accept that liberal discourse forms a complete ‘vocabulary’, as I have sought to argue above, there would then be more than one vocabulary competing for supremacy on the subject of sovereignty. However, this vocabulary, like its realist counterpart, is flawed to the extent that it cannot escape significant criticism in academic discourse.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!48 See David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 95; Thomas Weiss, ‘The Responsibility to Protect (R2P) and Modern Diplomacy’ in Andrew Cooper, Jorge Heine & Ramesh Thakur (eds), The Oxford Handbook of Modern Diplomacy (2013, Oxford University Press), 763, 765-767. 49 Fernando Tesón, ‘The Kantian Theory of International Law’ (1992) 92(1) Columbia Law Review 53, 92. 50 Fernando Tesón, ‘The Kantian Theory of International Law’ (1992) 92(1) Columbia Law Review 53, 92. 51 See, generally, Anne-Marie Slaughter, ‘A Liberal Theory of International Law’ (2000), American Society of International Law - Proceedings of the Annual Meeting, 240. 52 See, generally, Kathryn Hochstetler, ‘Civil Society’ in Andrew Cooper, Jorge Heine & Ramesh Thakur (eds), The Oxford Handbook of Modern Diplomacy (2013, Oxford University Press), 176, 176-191.

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LPT has sought to divorce itself from the methods of the realist tradition. This would explain why LPT has focussed on the means as well the ends of the international legal process.53 The desire to do so arose because positivism produced, and perpetuates, a system that serves the interests of the privileged. 54 Positivism utilises history and precedent to produce quasi-scientific assumptions to support a realist worldview. This is done so that legal decisions may be made in an allegedly objective context, outside the realm of politics. However, given that neither truly objective nor apolitical decisions are possible,55 it almost seems logical, that LPT fails to sufficiently account for history in its methodologies. Subsequently, LPT is obscured on account of its aversion to history, and its inherent subjective bias. LPT’s preoccupation with process and the normative functions of the law, as opposed to describing positive law, leaves it exposed to the possibility that it is ignorant of historical and cultural trends within international jurisprudence. For example, the modern international legal system developed during a time when colonialism was at its peak. 56 Refusal to apply a historical as well as historiographical lens to the discipline masks this fact.57 The vocabulary of LPT is then open to criticism for being ‘culturally imperialist’ given its

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!53 For example of this, see Rosalyn Higgins ‘Policy, consideration and the international judicial process’, above n19, 58 cited in David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 93. 54 This essay does not explore the full extent of this proposition, however, argument to support this proposition may be found at Augusto Zimmerman, Western Legal Theory: History, Concepts and Perspectives, (2013, LexisNexis Butterworths) 226. 55 Indeed, this is a position best demonstrated in the works of Koskenniemi, who continuiously demonstrates conscious preferences made by international lawyers: see, generally, Martti Koskenniemi, The Gentle Civilizer of Nations: The Rise and Fall of International Law 1870-1960 (2002, Cambridge University Press). 56 See James Crawford, Brownlie’s Principles of International Law (8th ed, 2012, Oxford University Press) 4; Martti Koskenniemi, The Gentle Civilizer of Nations: The Rise and Fall of International Law 1870-1960 (2002, Cambridge University Press) 9; See also, Arnulf Becker Lorca, ‘Eurocentrism in the History of International Law’ in Bardo Fassbender & Anne Peters (eds) The Oxford Handbook of The History of International Law (2013, Oxford University Press), 1034, 1034-1039. 57 For example, Koskenniemi takes a historiographical approach in his work. For an example, see Martti Koskenniemi, The Gentle Civilizer of Nations: The Rise and Fall of International Law 1870-1960 (2002, Cambridge University Press); for an overview, see George Rodrigo Bandeira Galindo ‘Martti Koskenniemi and the Historiographical Turn in International Law’ (2005) 16(3) European Journal of International Law, 539. Yet, the author, to the best of his ability, cannot point to similar studies in diplomatic theory.

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western-centric origin and development. Ultimately, this clouds the judgment of those in the rationalist tradition because they fail to see the inherent bias present within their own vocabulary. Consequently, not only then does LPT fail to assert dominance over positivism, it also fails to stand up to the criticisms of those within the constructivist movement, particularly in relation to the masking of its imperialist undercurrents.58

III. INTERNATIONAL LAW AS A LINGUISTIC CONSTRUCT

A. An Alternative Way of Theorising on International Law Critical theories in international law implore us to consider the inherent social relations that give the international system definition and structure. This position submits that identities and interests are a product of process. Consequently, interactions between actors in such processes then produce social constructions that are assumed to be objective reality within the realist and rational traditions. Critical Legal Theory (CLT), shares much in common with social constructivism. They are diverse as well as theoretically eclectic.59 CLT developed in response to a number of normative conflicts present within international law. In international legal theory, not only are legal scholars presented with a choice between a Statist and anti-Statist approach,60 they are also forced to confront the notion of whether international law is being consolidated,61 or is collapsing in on itself.62 The conflict noted above locks legal theorists into the same vicious cycle that IR scholars encounter, that of choice between realist and rational tendencies alone. What we might observe

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!58 Martti Koskenniemi, The Gentle Civilizer of Nations: The Rise and Fall of International Law 1870-1960 (2002, Cambridge University Press) 9; See also, Arnulf Becker Lorca, ‘Eurocentrism in the History of International Law’ in Bardo Fassbender & Anne Peters (eds) The Oxford Handbook of The History of International Law (2013, Oxford University Press) 1034-1039. 59 See David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 76-99. 60 See Hans Kelsen, Principles of International Law (1952, Lawbook Exchange Ltd) 240. 61 See Hedley Bull, The Anarchical Society – A Study of Order in World Politics (4th ed, 2002, Columbia University Press) 134-136. 62 See Martti Koskenniemi, The Politics of International Law (2011, Hart Publishing), 345-347.

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then is that CLT developed in an effort to mediate the unsustainable estrangement of realist and rational thought in the legal environment. In critical theory, there is a distinction to be made between conventional and critical constructivists.63 Conventional and critical ILT are each concerned with the ‘constitutive role’ that legal norms play in the formation of actors’ identities and interests.64 This is reflective of constructivism in international relations theory. There, Wendt argues on more than one occasion, that social structures should be the primary concern of political scholars on account of their capacity to shape the identity and interests of actors through mutually constituted knowledge, expectations and experiences.65 However, it is critical CLT that has the most to offer international jurisprudence. Critical CLT seeks to deconstruct and further understand the inter-subjectivity that underpins such processes.66 It differs from conventional CLT in that it does not merely describe social phenomena to examine the same objective reality for which we can criticise rationalist and realist thought.67 Indeed, such objectivity within the bounds of normative science is not possible. Martti Koskenniemi has, on numerous occasions, demonstrated the validity of this fact in international law.68 Consequently, it would appear the only way to provide an intellectually honest account of international law is to resort to critical CLT when analysing the international legal system.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!63 David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 105. 64 See Anne-Marie Slaughter, Andrew Tulumello and Stepan Wood, ‘International Law and International Relations Theory: A New Generation of Interdisciplinary Scholarship’ (1998) 92(3) American Journal of International Law, 367, 382 ; See also, David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 106. 65 See, eg, Alexander Wendt, ‘Constructing International Politics’ (1995) 20(1) International Security, 71, 73; Alexander Wendt ‘Anarchy is What States Make of It: The Social Construction of Power Politics’ in James Der Derian (ed), International Theory: Critical Investigations (1995, MacMillan), 129,, 135-173; Alexander Wendt, Social Theory of International Politics (1999, Cambridge University Press), 139-144. 66 See David Armstrong, Theo Farrell, Hélène Lambert, International Law and International Relations (2nd ed, 2012, Cambridge University Press) 106. 67 Ibid; see also, Martti Koskenniemi, The Gentle Civilizer of Nations: The Rise and Fall of International Law 1870-1960 (2002, Cambridge University Press) 1-3. 68 See, generally, Martti Koskenniemi, The Gentle Civilizer of Nations: The Rise and Fall of International Law 1870-1960 (2002, Cambridge University Press); Martti Koskenniemi, The Politics of International Law (2011, Hart Publishing).

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At the core of socially constitutive processes is another conflict, although, this conflict is infinitely more subtle. Critical constructivists argue that conventional constructivists fail to acknowledge this, and merely accept a socially cognisant version of the same objective reality put forward by realists and rationalists. Crucial to understanding these partialities is an awareness of what exactly the subtle conflict at the heart of social process theory is. Critical CLT posits that this conflict is one between competing inter-subjective vocabularies. Trends within international discourse certainly support this notion. A principle consideration of some of Koskenniemi’s more incisive work has been his study of the role language, and particular constructed vocabularies, play in the discourse that precipitates transformative social processes.69As a consequence of the competition between vocabularies within these regimes, legitimacy is considered instead of legality, regulations are generated instead of rules, and compliance is valued instead of responsibility.70 What we observe from such subtle changes in language is the transformative role terminology may have on the socially constructive process. Indeed, this is confirmed when we consider the constitutive role language plays in the perpetuation and mediation of alienation, and consequently, culture. It is to that endeavour I now turn.

B. Language in the Social Processes of International Law Very few scholars in international relations or international law have explicitly sought to engage with alienation as a social phenomenon or as theory in itself. This is also true of culture. With this in mind however, an exhaustive review of the etymological roots of alienation or culture is admittedly beyond the scope of this essay. Instead, this section will focus on the relationship between vocabularies and alienation, particularly the constitutive effect of each in the fermentation of culture. Within the remit of international relations, the most prominent and in depth account of alienation can be found in Der Derian’s On

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!69 See Martti Koskenniemi, The Politics of International Law (2011, Hart Publishing), 307-330. 70 Ibid, 320-322.

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Diplomacy.71 There, he sought to understand and reconceptualise alienation (both theory and phenomenon) to further inform diplomatic theory, even going to far as argue that alienation may be used to construct a ‘meta-theory of diplomacy’.72 In light of the above, and considering alienation lies at the heart of international jurisprudence, this section will rely solely on Der Derian’s reconceptualised form of alienation. Etymologically, alienation derives from the Latin word ‘alius’ (not to be confused with the English ‘alias’), which means ‘other’ if used as an adjective and ‘another’ when utilised as a noun.73 Der Derian concluded that alienation, in modern language, had come to encapsulate ‘relationship[s] marked by separation’.74 For example, in international law, both Grotius and Hobbes drew upon concepts of alienation.75 Each of them considered it perfectly ‘natural’ that individuals may alienate (or divest) their liberty to a sovereign entity in return for the provision of security.76 What then, lies at the heart of alienation? At this point of the essay it may very well seem cliché, but once again, the answer is language. Language serves as the means in which a thing may be alienated from its origin. Legal positivism, for example, is a political vocabulary alienated from the inter-subjective knowledge that gave rise to it.77 It is reified to the point where it seems to be objective, rational and detached from the inherent ‘politics of law’. Ultimately however, the product of this process is only sustainable so long as the vocabulary that gave rise to the process is sustainable. This is because vocabularies, as Koskenniemi observed, change.78 Vocabularies compete for conceptual dominance, merge, or simply co-exist !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!71 Der Derian’s study is likely the fullest account of alienation within the parameters of international relations and diplomacy, given a similar account is well beyond this essay; see James Der Derian, On Diplomacy (1987, Blackwell), 8-29. 72 James Der Derian, On Diplomacy (1987, Blackwell), 11. 73 Ibid. 74 Ibid, 14. 75 See Hugo Grotius, De Jure Belli Ac Pacis, Chapter VI; Thomas Hobbes, Leviathan, Chapter XIV; James Der Derian, On Diplomacy (1987, Blackwell), 15-17. 76 See James Der Derian, On Diplomacy (1987, Blackwell), 15-17. 77 See Martti Koskenniemi, The Politics of International Law (2011, Hart Publishing), 45-51. 78 See Martti Koskenniemi, The Politics of International Law (2011, Hart Publishing), 327-330.

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with one another, consequently affecting the social processes and structures around them.79 Simply stated then, if alienation is to be viewed as a social process, then competing vocabularies should be viewed as one of the prominent mediative tools that manage the degree to which two things are estranged. Consequently, what we might conclude about language is that it is as important as process in socio-political and socio-legal theory. The next social phenomenon discussed in this essay is culture. Etymologically, it

originates from the Latin word cultura, meaning ‘to cultivate’.80 In contemporary

literature, culture is an immensely tricky term to define. Koskenniemi, in framing his

methodology in international law, specifically avoided utilising culture as a term of

reference. He preferred ‘sensibilities’, because unlike culture, they are not

‘overburdened’.81 Similarly, Der Derian observed that culture was a ‘sponge word’

laden with different values and meaning.82 However, that did not stop him from

attempting a definition. He said ‘culture…can be viewed as a set of values and norms

of behaviour whose existence becomes self-evident – and subject to enquiry – when

those values and norms become estranged or in a state of transformation’,83 which

can be ‘invoked to define and validate social and political boundaries between alien

groups, and groups of alien ideas’.84 Broadly, we may view culture as a social

phenomenon that is both social and anti-social. Social in the sense that culture brings

together those whom reflect the perceived identity of the self; anti-social in the sense

that it constructs artificial boundaries to perpetuate estrangement between differing

groups and ideas.

Yet at the heart of ‘culturalisation’ is both alienation and language. Culture is

revealed to us when elements of our own identity become estranged, or when

revealed culture is forced into contact with a different kind of culture.85 Culture might

be present in any one of a number of different things. For example, Wendt argues

that anarchy, the state in which international society exists, is underpinned by three !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!79 Martti Koskenniemi, The Politics of International Law (2011, Hart Publishing), 327-330; See also, Carlo Focarelli, International Law as a Social Construct (2012, Oxford University Press), 93. 80 The Oxford English Dictionary, Volume II(C), (1933, Clarendon Press), 1247. 81 Martti Koskenniemi, The Gentle Civilizer of Nations: The Rise and Fall of International Law 1870-1960 (2002, Cambridge University Press) 2-3. 82 James Der Derian, On Diplomacy (1987, Blackwell), 31. 83 Ibid, 34. 84 Ibid. 85 James Der Derian, On Diplomacy (1987, Blackwell), 34.

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distinct cultures. 86 They are Hobbesian, Lockean, and Kantian, and their role

relationships are characterised in terms of enemy, rival and friend. 87 Yet,

etymologically, these terms of representation do not exist outside the mutually

constituted knowledge that has come to be associated with the names of each scholar

and structured in alternate and competing vocabularies. This signifies the role

language can play in the erection of culture. These cultures have developed identity as

a consequence of alienation, and that alienation was a consequence of one inter-

subjective vocabulary prevailing upon another.

Cultures, according to Wendt, are ‘self-fulfilling prophecies that tend to reproduce

themselves’.88 The same can be said for vocabularies. The identities and ideas that

persist and influence social processes, only do so because one vocabulary prevails

upon another, that very same vocabulary then seeks to explain why it did so

according to its own sense of logic. Whilst the materialisation of this process is

demonstrably subjective, the role vocabularies play in discourse between, and within,

international law is confirmed. Consequently, what we can say is, through

constitutive and competing vocabularies, language is central to understanding the

theoretical boundaries of international law, and in particular, the inherent social

phenomena which underpin it.

IV. CODA

The realist vocabulary reverberates around traditional notions such as sovereignty and seeks to disprove and dismiss other conceptions of how the world might be. Within the rational tradition, scholars have sought to disaggregate theory from the State. Indeed, this position and its accompanying vocabulary unify liberalism, and LPT in opposition to traditional assumptions of international politics. Instead, rationalists subscribe to a moralistic conception of international society where humanity is unified in sprit if not in polity. Consequently, the vocabulary that has sustained sovereignty and the State system has been challenged, but not

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!86 Alexander Wendt, Social Theory of International Politics (1999, Cambridge University Press), 309; for another brief discussion, see also, James Der Derian, On Diplomacy (1987, Blackwell), 15-16. 87 Ibid. 88 Alexander Wendt, Social Theory of International Politics (1999, Cambridge University Press), 309.

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eradicated. What remains is a dogmatic interdisciplinary conflict between old and new, with neither faction able to address its own limitations without reconciling itself to the existence of the other. Ultimately, social processes shape the identity and interests of actors, and subsequently, the structure of the international system. Central to these processes is the constitutive and formative role of language and its manifestation in vocabularies that construct, alter and disestablish shared meaning in equal measure. This essay has sought to prove why the substance as well as the form of language is important in all matters political. The modern international legal environment, in theory as well as practice, has significantly shifted since the dissolution of the USSR. No longer plagued by the bipolar power politics of days past, the modern international legal system is managerial and contained within a multitude of regimes. Power is diffused and actors employ a fusion of law and politics to address transnational issues that jeopardise the security of States and their citizens. At the crux of all of this however, is language. Words are politics, 89 and it is only through careful understanding and use of them that we will able to comprehend and shape the international legal system in a meaningful way.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!89 Martti Koskenniemi, The Politics of International Law (2011, Hart Publishing), 307.

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Australian Law Students’ Association 2014 Academic Journal Editor & Designer: Michaela Olsson The articles and opinions expresses in this Publication are not necessarily those of the Australian Law Students’ Association or of the Editor.

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