By Elise Bant
Background: the evolving laws of corporate attribution
It is now over five years since the Australian Law Reform Commission published its final report into Corporate Criminal Responsibility, itself a response to the legion of serious commercial misconduct the subject of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the FSRC). These enquiries may seem to have quietly faded from view. However, they prompted my Australian Research Council-funded research into developing a novel model of corporate responsibility entitled ‘Systems Intentionality’.
This ‘research ecosystem’ recently bore important fruit in Productivity Partners Pty Ltd v Australian Competition and Consumer Commission [2024] HCA 27; (2024) 98 ALJR 1021, in which Gordon J (seemingly supported by Steward J and Beech-Jones J in separate reasons) and Edelman J strongly endorsed the model. The way now lies open for further evolution of the law across civil and criminal law, as well as general law and statutory spheres.
Why is such evolution required?
As artificial juristic persons, corporations can neither innately think nor act. Yet corporations are now rightly recognised as having the capacity to engage in serious civil and criminal misconduct. Whether a corporation has acted deliberately, knowingly, mistakenly or by accident matters as much for corporate liability purposes as for natural persons, and has equal bearing on related normative assessments, such as through standards of recklessness, dishonesty and unconscionability. So, a principled and practical method to ascertaining these key elements of corporate responsibility is required.
Until now, the law’s approaches to meet this need have been largely individualistic: identifying responsible humans whose mental states, or conduct, and often both, can be treated for the purposes of the law as those of the corporation. The classic example is the so-called ‘directing mind and will’ of the corporation, embodied in the Board of Directors. Clearly deficient as an exclusive accountability mechanism, particularly in the face of diffused and horizontal organisational structures, courts and legislatures have sought to expand the range of relevant individuals whose minds and conduct may be attributed to corporate actors. The ALRC identified Australia’s ‘TPA model’ as a good example of an innovative approach that nonetheless remains inherently individualistic, and hence unable to address the realities of corporate structures and practices.
Beyond these individualistic attribution methods, for many years Australia has recognised the need for truly organisational models of responsibility. Its novel Corporate Culture provisions, found in section 12.3 of the Criminal Code, articulate holistic understandings of corporate fault, which may be found in ‘an attitude, policy, rule, course of conduct or practice existing within the body corporate generally or in the part of the body corporate in which the relevant activities takes place’. Since its introduction, the concept of Corporate Culture has had a powerful impact on corporate governance and regulatory practices in Australia. But, as the ALRC observed, while also well-supported theoretically, in practice, these provisions have been abject failures as liability mechanisms. Corporate Culture is simply too vague to be ‘fit for purpose’ as a principled and practical means of identifying the distinctive mental and related doctrinal elements of our laws governing corporate misconduct.
Systems Intentionality
My model of Systems Intentionality seeks to fill that gap. In brief, it posits that corporations manifest (in the dual senses of ‘reveal’ and ‘realise’) their states of mind through the real-life systems of conduct, policies and practices that they adopt and deploy. Systems of conduct are inherently purposive: they necessarily deploy to some end, at the least to achieve coordinated conduct, but also sometimes, more specific outcomes. Systems therefore manifest general and (sometimes) specific corporate intentions. Higher-level policies ‘nudge’ and guide the development of everyday systems: these reflect overarching corporate values and aims (similarly to some conceptions of ‘Corporate Culture’). Practices are also systems of conduct, which may develop organically as a matter of organisational habit. All forms of system also manifest certain corporate knowledge, for example the knowledge necessary for the systems to deploy successfully (that is, according to their terms). Consistently, genuine corporate mistakes are revealed when the usual systems mis-fire. By contrast, claims of corporate error are not supported when practices are sustained over time and in the face of their patent effects: here, claims of ‘systems errors’ may be better understood as strategic narratives of denial, meriting condemnation as a refusal to take responsibility for corporate-intentional conduct.
While this might seem rather esoteric and high-level, the model provides a principled and practical tool-kit for addressing corporate misconduct of a huge variety of shapes and forms – including automated and algorithmic misconduct of the kind that necessarily frustrates individualistic attribution inquiries. The model builds heavily on existing law, including the Corporate Culture provisions and related scholarship, but also, importantly, Australia’s rich jurisprudence arising from its statutory prohibitions on unconscionable systems of conduct. This details how system of conduct may be identified and proven and, importantly, contains piercing judicial insights into the nexus between systemic conduct and corporate mental states relevant to the assessment of statutory unconscionability. Productivity Partners both contributes to that body of learning and powerfully demonstrates the utility of this new approach.
Productivity Partners
Productivity Partners (trading as Captain Cook College) was one of many vocational education and training (VET) colleges that adopted sales and marketing malpractices, in order to earn Commonwealth funding support pursuant to its then-applicable VET FEE-Help Scheme. It hired a veritable army of corporate and natural third-party recruiters (called ‘course advisors’) to sign up remote, regional and disadvantaged students into its online courses. Recruiter commissions, and contract renewals, were solely based on numbers of student enrolments, assessed as at the date of census. At that point, the Commonwealth paid the College, which paid the recruiters. Students, meanwhile, incurred a debt of 120% of the course fee to the Commonwealth.
Highly incentivised and unconstrained by training or supervision, recruiters commonly used combinations of misleading conduct and pressure tactics, as well as offers of ‘free laptops’ and cash inducements, to sign up students.
Unsurprisingly, such students were frequently wholly unsuited to their programs of study, and incapable of completing them. Substantial numbers never logged in. Many had little or idea of the heavy levels of Commonwealth debt that they accepted with their ‘free’ laptop.
The College originally had two procedural safeguards in place to address these patent risks of recruiters attracting ‘unwitting and unwilling’ students. ‘Outgoing’ calls from the College checked that students understood the financial burden of enrolling and were able to undertake the course. A campus-led withdrawal process identified and unenrolled students who failed to engage with the course, prior to census date. From a ‘Systems Intentionality’ perspective, these systems manifested the College’s organisational knowledge of the reality that unwitting and unsuitable students were being enrolled, and an intention to protect them (albeit after the event) from the inevitable consequences of such misconduct. The safeguards were effective, resulting in around half of registered students withdrawing before census date.
In that context, it was striking that, following a period of diminishing profits, the College changed its enrolment processes. The outward-bound call was replaced by an inbound format, in theory ‘initiated’ by the student, but in practice generally conducted through or by the recruiter. Its effectiveness as a withdrawal mechanism unsurprisingly collapsed. The campus-led withdrawal process was simply scrapped. The changes yielded immediate financial dividends: College income rose from AU$326,125 in August 2015 to approximately AU$18.9 million in December 2015.
Before the High Court, the College argued, among other things, that it did not intend for the recruiters to engage in the misconduct. It admitted that its enrolment processes were ‘imperfect’, but claimed they did not constitute the kind of reckless, knowing and intended misconduct that would support a finding of statutory unconscionable conduct. Its corporate states of mind were, therefore, squarely in issue.
All the High Court justices rejected the College’s claims and affirmed it had engaged in statutory unconscionable conduct contrary to Australian Consumer Law ss21 and 22. There was ample evidence that senior management was heavily involved in the College’s decision, satisfying traditional and statutory attribution rules. But the reasons of Justice Gordon and Justice Edelman are ground-breaking for adopting explicitly organisational approaches to the questions in issue, consistent with (and citing) Systems Intentionality. Thus Gordon J explained (at [108]‒[109], emphasis added, see further [110]‒[111], [134], [143]):
A “system of conduct” connotes “an internal method of working” or a plan of procedure. Such a system may develop organically as a practice, operate at a level of policy or be a combination of practice and policy. Corporations “think” and act through systems. Systems are inherently purposive. Systems are objectively designed to achieve certain ends; they coordinate and connect steps and processes to an end. Knowledge of certain matters is often implicit in a system – for example, that a predatory business model will only be profitable if a certain class of vulnerable customer exists and is successfully exploited.
As Professor Bant has explained, a corporate system can be understood as a manifestation of corporate intentionality.
On this approach, the College’s decision to dismantle its protective processes manifested its intention to reap profits at the expense of students, in full knowledge of the foreseeable, likely and indeed inevitable consequences for the students involved. That conduct was unconscionable.
Justice Edelman likewise explained (at [237]; see further [199]‒[200], [236], [238]‒[241]) that the statutory unconscionability provisions recognise a general principle of ‘systems liability’, by which actions and intentions are attributed to a corporation directly from its systems rather than from any natural person. This sort of approach addresses a range of problems with, or limitations of, individualistic attribution models, including those arising from greater incorporation of AI processes into everyday corporate conduct. Through this systemic lens, his Honour concluded that, while it might be accepted that the College did not ‘desire’ its agents’ misconduct, or the enrolment of unsuitable students, as ends ‘good’ in themselves, the College’s (revised) system of enrolments manifested its choice to adopt agent misconduct or unsuitable student enrolments as the means to the ultimate end of maximising profits. That intended conduct was, in all the circumstances, unconscionable.
Where to from here?
The ramifications of this decision must await further judicial exegesis. It may be read restrictively. The same decision could have been reached using individualistic attribution approaches. And it may be confined to its statutory context.
On the other hand, Gordon J and Edelman J were explicit that their reasoning was general: this is (also) how corporations think.
If such reasoning is adopted, what might follow? First, and as the case itself evidences, adopting a systemic approach to corporate responsibility does not mean a ‘free pass’ for delinquent directors, senior managers, agents or employees involved in the wrongdoing. These remain subject to their personal and positional obligations, as well as subject to different forms of accessorial liability. Thus, the acting Chief Executive Officer of the College, Mr Wills, was found to be knowingly concerned in the College’s misconduct. It followed that the College’s parent company, Site, of which he was the Chief Operating Officer, was similarly statutorily liable as a corporate accessory.
Relatedly, it is striking that Productivity Partners concerned responsibility for an unconscionable business model deployed through (among other elements) a corporate network of third-party recruiters. If the systemic analysis works in the context of corporate networks, it must have implications for systems of misconduct deployed by parent companies through corporate groups, or to which they are accessories.
Further, System Intentionality explains how to build, maintain and reform Corporate Culture: no small matter for corporate governance, regulation, and rehabilitation. Here, my colleague Rebecca Faugno’s groundbreaking work on corporate reform and rehabilitation orders points the way.
Finally, the implications for public juristic persons, such as the body politic of the Commonwealth of Australia, demand sustained attention. The line between corporation and state has never been clear. With governments increasingly operating through public corporations, as well as automated and algorithmic processes, and out-sourcing to private corporate providers, it is time to consider afresh the stubbornly narrow and individualistic attribution approaches to public responsibility.
