THE PICTURE: Understanding the new prohibition on ‘unconscionable conduct’
Anew prohibition against ‘unconscionable conduct’ in trade is one of a number of changes to the Fair Trading Act 1986 (FTA) that come into force from 16 August 2022. The new prohibition may have wide-ranging implications for many businesses, and could potentially lead to prolonged debate in the courts.
The amendments to the FTA also include well-heralded changes to the ‘unfair contract terms’ (UCT) regime, as well as strengthened restrictions on uninvited direct sales (door-to-door sales). Much of the recent focus in the business community has been on the changes to the UCT provisions, which currently applies to standard form consumer contracts, and which many businesses are already familiar with. The extension of that regime to certain ‘small trade’ business contracts has provoked active discussion (see our article Unfair Contract Terms in B2B Contracts).
This has somewhat overshadowed the introduction of unconscionable conduct.
In contrast to the UCT amendments, such conduct is dealt with very briefly in the amending legislation (two short provisions) and, at first glance, can appear less significant, and deceptively straightforward.
However, the new prohibition is remarkably broad in application. Unlike certain other aspects of the FTA, it cannot be contracted out of, and (unlike UCTs) it is not limited to contractual arrangements. The amended FTA also provides no definition of what will amount to unconscionable conduct, and it could potentially apply in a wide range of circumstances. As the Minister for Commerce and Consumer Affairs noted during the passage of the amendments “I haven't gone with a definition, because that could limit the circumstances in which the protections could be used.
I personally wouldn't want to predict the
types of situations that could be defined as unconscionable conduct.”
It is therefore left to the courts to determine what type of conduct will be ‘unconscionable’. As the experience of the Australian Courts has shown, in relation to an equivalent restriction in the Australian Consumer Law, that is no easy task.
Businesses will hope to see meaningful insight from the New Zealand Courts on the scope and limits of the new unconscionable conduct prohibition when it is first tested, and from the Commerce Commission in its regulatory guidelines (which are expected shortly). Without clear clarification, the new prohibition is prone to variable value judgments and inconsistent interpretations.
In this Big Picture, we look at some of the key principles likely to govern the new prohibition and how it could apply to businesses, by exploring the background to the changes and recent guidance from overseas.
The FTA will, from 16 August 2022, include the new statutory prohibition on unconscionable conduct at section 7 (see box). The prohibition will not apply to any conduct carried out before 16 August 2022.
The provision makes clear that the statutory prohibition has broader effect than the previous equitable doctrine against unconscionable conduct. That doctrine, commonly known as the doctrine of unconscionable bargains, or unconscionable dealing, has been frequently recognised by New Zealand Courts.
The equitable doctrine seeks to protect those suffering from a significant disability or disadvantage from exploitation. Traditionally the doctrine has required the identification of three key elements:
• A specific disadvantage (for example, old age, or mental or physical infirmity) affecting the weaker party. This requires more than an inequality of bargaining power. Rather, there must
be a particular characteristic which significantly diminishes that party’s ability to assess their own best interests.
• Knowledge of that disadvantage by the stronger party.
• The stronger party takes advantage of the other party's disadvantage in a way that makes it unconscionable to permit the stronger party to receive the benefit of the transaction.
Commonly the doctrine is relied on where a party to a contract seeks to have the contract set aside. If the above elements are met, the stronger party must show that the transaction was fair and reasonable and should be upheld.
As new section 7 makes clear, the new statutory prohibition is not limited by these pre-existing rules.
Importantly, it is not possible to contract out of the new prohibition on unconscionable conduct. Therefore, even where a contract excludes other FTA provisions (where permitted by the FTA) that would not prevent a counterparty from alleging unconscionable conduct.
(1) A person must not, in trade, engage in conduct that is unconscionable.
(2) This section applies whether or not — (a) there is a system or pattern of unconscionable conduct; or (b) a particular individual is identified as disadvantaged, or likely to be disadvantaged, by the conduct; or (c) a contract is entered into.
(3) This section is not limited by any rule of law or equity relating to unconscionable conduct.
Section 8 then sets out various considerations which the court can consider when assessing whether a person’s conduct is unconscionable. They fall into two groups: general considerations, and considerations in the context of a contract.
(a) The relative bargaining power of the person engaging in the conduct (the trader) and any person (whether or not an identified individual) who is disadvantaged, or likely to be disadvantaged, by the conduct (an affected person).
(b) The extent to which the trader and an affected person acted in good faith.
(c) Whether, taking account of the particular characteristics and circumstances of an affected person, the affected person or the affected person’s representative was reasonably able to protect the affected person’s interests.
(d) Whether an affected person was able to understand any documents provided by the trader.
(e) Whether the trader subjected an affected person to unfair pressure or tactics or otherwise unduly influenced an affected person.
(f) Whether the trader unreasonably failed to disclose to an affected person— (i) any intended conduct of the trader that might adversely affect the affected person’s interests; and
(ii) any risk to the affected person’s interests arising from the trader’s intended conduct, if the trader should have foreseen that the risk would not be apparent to the affected person.
(g) If there is a contract to which the conduct relates, anything listed in subsection two (see right hand column).
(h) Any other circumstance that the court considers relevant.
(a) The circumstances in which the contract was entered into, including— (i) any inducement to enter into it; and
(ii) the extent to which the affected person had an effective opportunity to negotiate the terms.
(b) Whether the affected person obtained independent legal advice, or other independent professional advice, about the contract before entering into it.
(c) The terms of the contract.
(d) The form of the contract, including, in the case of a written contract, whether its terms are transparent.
(e) Whether the terms of the contract allow the affected person to be reasonably able to meet their obligations under it.
(f) Whether the affected person’s obligations under the contract are reasonably necessary for the protection of the trader’s legitimate interests.
(g) The conduct of the trader and affected person in complying with the terms of the contract.
(h) The length of time the affected person has to remedy any breach.
(i) Whether any action by the trader in relation to enforcement of the contract was lawful.
(j) Any other conduct of the trader or affected person, after the contract was entered into, in connection with their relationship.
These considerations are similar to those which apply under the separate UCT framework (for example, whether contractual obligations are reasonably necessary for the protection of the trader’s legitimate interests). This means that, in practice, allegations of UCTs may frequently be coupled with allegations of unconscionable conduct.
Unconscionable conduct will be a relevant consideration when entering into agreements in some contexts, particularly where there is an imbalance of bargaining power, or where the counterparty suffers from any particular vulnerabilities. Where appropriate, recommend that the counterparty take independent advice in relation to the relevant transaction, and allow time to consider the terms of a contract. Ensure you comply with the Unfair Contract Terms regime (click here for our separate guidance).
Heavy-handed exercise of contractual rights could potentially be challenged as unconscionable. Businesses can reduce this risk, where relevant, by exercising contractual rights and discretions fairly and flexibly, setting fees and charges proportionately to their interests, and providing reasonable notice when exercising unilateral variation rights. Unconscionable conduct will also be a relevant consideration when exercising termination rights, and deciding whether to allow time to remedy a breach.
Misleading advertising could, in addition to breaching other provisions under the FTA, potentially constitute ‘unconscionable conduct’ in some circumstances. That is particularly likely where a marketing campaign is deliberately misleading or is targeted at a particularly vulnerable audience. Retailers and their agents should avoid any unreasonable sales tactics, for example pressuring customers into buying something they don't want or can't use. Equally, sharp increases of prices of essential products during a crisis, or where there are few alternatives, could be seen as unconscionable.
Uncompromising or aggressive responses to complaints or customer disputes could, particularly if the relevant complaint has merit, be considered unconscionable. To reduce that risk, businesses should deal respectfully and even-handedly with disputes where they arise, particularly when dealing with vulnerable customers or counterparties.
Given its wide application, the new prohibition on unconscionable conduct could potentially be relevant to a range of unexpected areas, such as data privacy (e.g. algorithms, AI and biometrics), M&A, and any contexts where there is an asymmetry of information or bargaining position.
The likelihood of these risks arising will vary depending on the nature of each business, and the nature and number of their customers and counterparties. However, even a single claim could be potentially damaging to a business’s reputation (even if successfully defended).
Importantly, a business will be liable for unconscionable conduct by its directors, employees, or agents acting on its behalf (or by any other person acting at their direction or with their consent). It will therefore be important to implement robust internal policies, procedures and training programmes.
The new unconscionable conduct prohibition has some overlap with existing regimes, including:
There is an express restriction on oppression under the Credit Contracts and Consumer Finance Act 2003 (CCCFA).
‘Oppression’ is defined in the CCCFA as “oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice”.
The courts have held that the scope of oppression under the CCCFA is broader than the equitable doctrine of unconscionability (although that was before the new statutory remedy for unconscionable conduct).
It will be interesting to see how CCCFA oppression overlaps with the new remedy in due course.
Interestingly, during submissions, the Ministry of Business, Innovation and Employment (MBIE) submitted in favour of limiting the prohibition to ‘oppressive’ conduct (based on the CCCFA) rather than prohibiting ‘unconscionable’ conduct. However, the government ultimately preferred a prohibition on unconscionable conduct, for consistency with Australia.
The equitable doctrine against unconscionability, which protects those who enter into bargains when they are under a significant disability or disadvantage, is unaffected by the new statutory prohibition (discussed earlier, in section 2).
Consumers and businesses are already protected by a range of existing obligations and prohibitions.
Under the FTA, for example, it is illegal to: mislead or deceive another person in trade (section 9), make unsubstantiated representations in trade (section 12A), harass or coerce another person in connection with the supply of goods or services (section 23), engage in bait advertising (section 19), or include unfair contract terms in standard form consumer contracts (section 26A).
Under the Consumer Guarantees Act 1993, all consumer goods and services must be of acceptable quality, be fit for purpose, correspond with their description/sample, and have spare parts available – and businesses must not charge more than a ‘reasonable price’ for a consumer good if no price has been agreed.
The Commerce Act includes various prohibitions on anticompetitive conduct. For example, it is illegal for a business with a substantial degree of market power to take advantage of that market power for an anti-competitive purpose (section 36) for any business to enter into arrangements that have the purpose, effect, or likely effect of substantially lessening competition in a market (section 27). The Commerce Act also prohibits entering into a contract, arrangement or understanding containing a cartel provision or otherwise giving effect to a cartel provision (section 30), or engaging in resale price maintenance (section 37).
The Financial Markets (Conduct of Institutions) Amendment Act 2022 (enacted in June 2022) will bring registered banks, licensed insurers, and registered non-bank deposit takers within a principles-based ‘fair conduct’ regulation regime.
During the passage of that legislation, the proposals were heavily criticised as adding to an “avalanche of legislation.”
Concerns have also been raised about the compliance burden of the new conduct regime and the limited segment of the finance sector that will be captured by the regime (that is, banks, insurers and registered non-bank deposit takers and their intermediaries).
In many situations where breaches of the above provisions are alleged, New Zealand businesses must now also consider the risk of allegedly ‘unconscionable conduct’ and the adverse enforcement consequences (and reputational damage) that could arise as a result.
As noted in the introduction, unconscionable conduct is not defined in the amendments to the FTA.
The courts will be left to identify the boundaries of the new prohibition, including by reference to the guiding considerations set out in the FTA, noted earlier in page 3. In addition, the Commerce Commission intends to issue guidance, expected shortly.
At this stage, the following offer an indication of the intention of the new prohibition:
• The explanatory note to the bill describes unconscionable conduct as “serious misconduct that goes far beyond being commercially necessary or appropriate.”
• Similarly, Dr David Clark (Minister for Commerce and Consumer Affairs) noted during the third reading of the bill:
Despite these assurances, the absence of the definition caused unsurprising concern. As was noted in submissions on the bill:
“We suggest the Bill be made more precise to avoid confusion and increase certainty for both consumers and businesses by including a definition of unconscionable conduct. Without further clarity we are concerned the provisions could fail to achieve their intended affect.”
Consumer NZ
Unconscionable conduct covers behaviour that's both unfair and oppressive. We're talking about serious misconduct here that goes beyond what's commercially necessary or appropriate, and that might involve a large business taking advantage of a small business's lack of bargaining power to pressure it into accepting certain contract terms... The bill makes it clear that we're targeting business practices which involve a high threshold of misconduct, and let me say again, just to be really clear: if people are operating a business in a fair way, they have nothing to fear from this change in the legislation.
“The proposed restrictions on unconscionable conduct create uncertainty for businesses as it is a term that is inherently subjective and could be used as a bargaining tool for smaller players to push back on reasonable terms that are genuinely in the legitimate interests of the trader.”
Certainly, the breadth of the new prohibition creates some significant uncertainty for the business community.
The considerations listed in section 8 will provide only partial comfort. It is not clear what weight the court should attribute to each of those factors, or the extent to which their existence should be treated as dispositive symptoms of unconscionable conduct. Will the mere imbalance of bargaining power be sufficient to conclude that the stronger party has acted ‘unconscionably’? Is the absence of ‘good faith’ synonymous with ‘unconscionable conduct’?
Such considerations will require careful clarification by the New Zealand Courts when new section 7 of the FTA is tested for the first time.
Positively, the proposed provisions have been intentionally introduced to align with the Australian regime, and therefore the Australian judgments (discussed further in the next section) are likely to provide relevant guidance to a New Zealand Court approaching the new prohibition.
Dr David Clark Minister for Commerce and Consumer AffairsThe new prohibition against unconscionable conduct in the FTA is based on the equivalent prohibition in the Australian Consumer Law (ACL), which was introduced in 2011.
Section 21 of the ACL prohibits a person from engaging in conduct that is in all the circumstances unconscionable in connection with the supply or acquisition of goods or services. As under the FTA, the ACL does not provide any clear definition of what unconscionable conduct comprises but does set out an open-ended list of considerations, which largely corresponds to new section 8 of the FTA (and includes, for example, the parties’ relative bargaining positions, and whether the parties acted in good faith).
The relevant Australian regulators, the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC), have actively enforced the unconscionable conduct prohibition, which has resulted in a range of judgments from Australian Courts. That case law highlights, as much as anything,
the particular difficulty of defining what unconscionable conduct really means, and various cases emphasise that a fact-specific inquiry is required into all the circumstances in each case.
However, it is possible to discern various emerging principles from the Australian cases:
First, the Australian case law confirms that there is no specific requirement to demonstrate a pre-existing disability or disadvantage in the affected party (even though that will often be a feature of unconscionable conduct).
The conduct should be assessed by reference to community values or the ‘norms of society’ (including fairness in dealings with consumers, or honesty in business transactions).
The threshold requires more than mere unfairness; the conduct in question must be irreconcilable with what is right or reasonable.
Imbalance in bargaining power does not, of itself, establish that the stronger party has acted unconscionably.
Where the defendant has not acted dishonestly, that is a material factor which weighs against a finding of unconscionable conduct (although strictly a party can breach the provision even if the conduct does not involve dishonesty).
Unconscionable conduct is not limited to the ‘worst kind’ of conduct. There may be more and less serious examples. The scale of penalty will reflect the seriousness of the conduct.
Australian Courts have attempted various definitions of ‘unconscionable conduct’ none of which are particularly user-friendly. Unconscionable conduct was described in one Australian judgment as requiring “moral obloquy”; in another, as reflecting “the language of business morality” and “basal values familiar to business people and ordinary people.”
To help illustrate the thin dividing line between unconscionable conduct, and permissible conduct, we summarise four leading Australian decisions:
• Lux Distributors telephoned various consumers and offered a free ‘maintenance check’ on vacuum cleaners.
• Various elderly respondents agreed to be visited for that purpose. A Lux Distributors salesperson carried out the maintenance check and then attempted to sell the householder a new vacuum cleaner.
• The court found that the conduct was unconscionable because it involved taking advantage of a ‘deceptive ruse’ to gain access to consumers’ homes and then engaging in pressure sales tactics so that the vulnerable consumers agreed to make a purchase.
Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90
• A bank customer challenged certain late payment fees as unconscionable, because of an alleged disparity between the level of the fees and the bank's costs caused by late payment. On appeal, the court noted the fees were not unconscionable given the “lack of any proven predation on the weak or poor, the lack of real vulnerability
requiring protection, the lack of financial or personal compulsion or pressure to enter or maintain accounts, the clarity of disclosure, the lack of secrecy, trickery or dishonesty, and the ability of people to avoid the fees or terminate the accounts”.
• The High Court additionally noted: “The existence of a disparity in bargaining power, which is an all-pervading feature of a capitalist economy, does not establish that the party which enjoys the superior power acts unconscionably by exercising it. To do so would require the court to be a price regulator in banking business in connection with otherwise honestly carried on business in which high fees were extracted from customers."
• A property investment company (Quantum Housing) arranged property investments that qualified for incentives under a government scheme. Quantum entered into agreements with investors wishing to be involved in the scheme. From 2017, Quantum Housing began encouraging investors to terminate relationships
with existing property managers and transfer to other managers (with whom it had commercial links, unknown to the investors). It required other property managers to pay security deposits of AU$10,000 if the investor did not agree to change managers.
• Initially, the court held that because the investors had no specific disadvantage or pre-existing vulnerability, the conduct could not be unconscionable. On appeal, the court held those elements were not required; rather, Quantum’s conduct was unconscionable conduct because it had: (a) misused its superior bargaining position by dishonestly misleading investors; and (b) obtained undisclosed financial benefits.
Australian Competition Consumer Commission v Quantum Housing Group Pty Ltd [2021] FCAFC 40
Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28 (27 July 2016)
• A storekeeper in rural Australia offered credit arrangements to indigenous customers, requiring that customers provided a debit card linked to the account to which their wages or benefit payments were credited. The storekeeper also required the customers to disclose their card PIN numbers. The storekeeper withdrew funds from the
customers’ accounts to pay off amounts due for the supply of goods in the store.
• The majority of the High Court held that it was not unconscionable, because there was no exploitation of the customers. Further, though not determinative, it was relevant that the storekeeper had acted with a degree of good faith and not dishonestly (and the scheme was widely used and popular among the community).
Australian Securities and Investments Commission v Kobelt [2019] HCA 18
In New Zealand, businesses that are found to have acted unconscionably will face the following potential consequences:
(where a person has suffered, or is likely to suffer, loss or damage by the unconscionable conduct).
of up to NZ$600,000 (or NZ$200,000 for an individual).
(which the Commission can seek in connection with any matter relating to the enforcement of the FTA).
restraining conduct that constitutes a breach of the prohibition.
including orders declaring all or part of a contract to be void or varied.
The significance of these enforcement outcomes could be considerably magnified in the context of a class action, or regulatory investigation, relating to a wide number of customers or counterparties.
It will therefore be important for businesses to pay close attention to regulatory guidance (including the new guidelines from the Commerce Commission expected shortly) and emerging case law, to ensure that their commercial practices remain on the right side of what is currently a very indistinct line.
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expertise covers a wide range of core compliance frameworks, including retail and ecommerce, payments, consumer credit, privacy and cyber security, as well as evolving areas of regulation such as emerging technology, ESG and modern slavery.
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