An allegation of unconscionable conduct in business dealings arises when a party to a contract says or does something that is so unreasonable that it defies good conscience. The Courts will intervene and potentially set aside a contract if at the time the contract was entered into there ought to have been matters “preying on the conscience” of the “stronger” party to the contract.
Unconscionable conduct typically arises when:
- One party to the contract is in a position of superior bargaining power;
- Whether any conditions were imposed on the weaker party that were not reasonably necessary to protect the legitimate interests of the stronger party;
- That the weaker party is in a position of disadvantage due to factors such as age, poverty, lack of English, poor education and so forth. In such a situation the weaker party is deemed to be in a position of ‘special disadvantage’;.
- That the weaker party was pressured in some way into signing the contract or not given sufficient opportunity to consider the matter or seek advice;.
- That the stronger party displayed a lack of good faith;.
- That the terms of the contract are unfair. Unfairness alone is not sufficient, there must be something in the conduct that goes against societal norms.
The equitable doctrine of unconscionability is encoded in Sections 21 and 22 of the Competition and Consumer Act 2010. (ACL). Section 21 of the ACL prohibits unconscionable behavior in connection with the supply of goods or services, or the acquisition of goods or services, in a business transaction.
Recent High Court case
The law in this area is currently in a state of uncertainty, concerning the issue of voluntariness of the weaker party’s conduct. In recent case, the High Court was split 4:3 over the definition of unconscionable conduct. The case concerned a “book up” credit scheme operated in a remote Aboriginal community.
In their majority judgment, Keifel and Bell JJs found that the trader did not act unconscionably because the customers voluntarily entered into the contract, there was limited evidence of dissatisfaction with the arrangement and it was not established that the trader exploited his customers’ socio economic vulnerability in order to obtain a financial advantage.
In their minority judgment, Nettle and Gordon JJs found:
“It is because a transaction is voluntarily entered into by someone under a special disadvantage that unconscionability developed in order to ensure that persons who are vulnerable and unable to protect their own interests are not the victim of conduct by a stronger party in taking advantage of that vulnerability”
According to the minority judgment, while the weaker party’s conduct may appear to be voluntary, the reality may be otherwise due to conditions of special disadvantage meaning that they are unable to exercise an informed judgment about the nature of the contract.
It is clear as a result of this decision that further refinement of the legislation is required.
How to avoid engaging in Unconscionable Conduct
- Do not exploit the other party when negotiating the terms of an agreement or contract.
- Take care to be reasonable when exercising your rights under a contract.
- Consider the characteristics and vulnerabilities of your customers. For example, use plain English when dealing with customers from a non-English speaking background. Or give them an opportunity to use an interpreter.
- Make sure your contracts are thorough, easy to understand, not too lengthy, and do not include harsh unfair or oppressive terms.
Know Compliance Legal Advice
Should you require a review of your terms and conditions, Know Compliance is able to peruse them in order to ensure that they do not leave your company exposed to an allegation of unconscionable conduct.