What does ‘unconscionable conduct’ mean?

The Fair Trading Act prohibits unconscionable business conduct. It is business activity that is a substantial departure from Aotearoa New Zealand’s generally accepted or expected standards of business conduct. This is conduct of a type that should rarely occur as it so obviously departs from what is to be expected from those acting in good commercial conscience.

Australian law includes a similar prohibition. New Zealand courts are likely to interpret the meaning of unconscionable conduct in a similar way to the Australian courts. They have interpreted unconscionable conduct as being serious misconduct that is so far outside accepted standards of commercial conduct as to be against good conscience. Good business conscience is measured against the values and norms of modern society and expectations of what is right and proper according to those values and norms. Those values and norms can include acting honestly, fairly and without deception or unfair pressure. This is conduct that is more than just hard commercial bargaining but clearly unfair and unreasonable.

Unconscionable conduct can take many forms. It can include a contract between a business and a customer, but it does not have to. It can also involve one off activity or a system, or pattern of conduct. No individual needs to be identified as disadvantaged or likely to be disadvantaged by the conduct for it to be considered unconscionable. However, this may often be the case with the most serious cases of unconscionable conduct.

Whether the courts consider conduct is unconscionable depends on the circumstances of the business or the affected person. The courts may consider a range of factors in assessing whether certain conduct is unconscionable and some of these factors are listed in the legislation (s8(1) of the Fair Trading Act). In summary, these are:

  • the relative bargaining strength of the parties
  • the extent to which the parties acted in good faith
  • whether the affected party could protect their own interests given their characteristics and circumstances
  • whether the affected party could understand documents provided to them
  • the use of undue influence, pressure or unfair tactics by the business
  • whether the business made clear to the affected person anything the business might do that would adversely impact the affected person’s interests or create a risk for them.

The court can also have regard to any other circumstances that indicate that the business has acted unconscionably, in addition to the factors listed.

If parties have entered into a contract, the courts may also consider (s8(2) of the Fair Trading Act) matters such as the circumstances at the time the contract was entered into, including whether there was an opportunity for effective negotiation and legal advice, whether the terms of the contract are reasonable and the conduct of the business after the contract was entered into.

Who does it apply to?

All businesses need to take care to ensure their business conduct and contracts are not unconscionable. An affected party can be an individual or a business.

How to avoid acting unconscionably

You can avoid unconscionable conduct and contracts by making sure that you act reasonably and in good faith when dealing with other parties such as your customers. When considering whether conduct is unconscionable the court will consider all the circumstances of the case. You should also think about their circumstances and the circumstances of your agreement or contract.

For example, this means considering your customers’ circumstances and considering how well equipped they are to look out for themselves. Are they likely to understand the information you have given them about the business arrangement or contracts they are agreeing to, or would they better understand it if it was presented to them in a different way? For example, are you presenting information clearly without using jargon or technical language? Have you clearly disclosed any important or unusual terms or conditions of the agreement or arrangement?

Taking your customers’ circumstances into account may include thinking about their age and any unique needs they have, for example, do they come from a non-English speaking background where using plain English will assist their understanding (or the use of interpreters may be needed).

All businesses are entitled to protect and advance their own business interests, but you should also consider whether you might be taking advantage of your customers, for example, taking advantage of their lack of commercial experience or expertise. Have your customers freely entered into a business arrangement with you, or might they have felt unfairly pressured or influenced to agree or to enter into a business relationship on the terms offered to them? For example, is it possible that free goods or services or other inducements that you have offered and/or the way they are offered might have encouraged customers to sign up without thinking it through?

Consider whether you have allowed your customers the opportunity and time to consider and discuss what is on offer – have they had time to understand the documents you have provided them, had the opportunity to ask questions and to seek independent advice to help them make informed decisions. Have you been clear about anything your business might do that would adversely affect your customer or create a risk for them?

Ensure your staff are aware of their obligations to avoid unconscionable conduct by treating customers fairly. We recommend that you prepare guidance for your staff and provide refresher training regularly.

If found guilty of unconscionable conduct, businesses can be convicted and fined up to $600,000 and individuals can be liable for fines of up to $200,000. The courts can also make a range of other orders under the Fair Trading Act, such as requiring businesses to compensate consumers or vary a contract.

What to do if you think a business’s conduct is unconscionable

If you are concerned about conduct by a business that may be unconscionable, you can report it to the Commission. A business or consumer can also take private action. You may wish to seek legal advice before taking such action.

Lessons from Australia

Until we have experience of court decisions here, we can look across the Tasman for examples of the kind of business conduct that might be considered to be unconscionable.

When assessing whether conduct is unconscionable, the Australian courts have focused on the conduct of the parties and assessed whether it is enough of a departure from the norms of acceptable commercial behaviour ‘to be against conscience or to offend conscience.’

  • For example, in one case found to involve unconscionable conduct, a business’ salespersons used deception to gain access to the homes of women that the court considered to be older and vulnerable. They sold the women expensive vacuum cleaners they did not want or need by creating a sense of obligation to buy.
  • In another case, a franchisor demanded a 50% fee increase from its franchisees for access to a national telephone number which the franchisees relied on to receive consumer inquiries and work. The franchisor disconnected franchisees from the telephone number when they did not pay the increased fee. It also required existing franchisees to vary their franchise agreements to include the increased fee. The court found that the franchisor abused its position of strength and engaged in conduct that involved misstatements, non-disclosure of information, threats and intimidation. The court also found that the conduct amounted to unilateral profit gouging and all the elements together, showed that the franchisor’s conduct was unconscionable.
  • In another case, the Australian court found an education provider guilty of unconscionable conduct relating to online diploma courses. Students were enticed to enrol in full-time courses with claims the courses were free and by offers of free laptops, but they were enrolled under a student loan scheme and were left with large debts. The company did not assess the students' suitability for the courses including their language, literacy and numeracy skills and students were unlikely to complete the course. The company also paid large commissions to salespeople who they did not train and monitor.

You can read more details about unconscionable conduct in the Fair Trading Act.