07 Jun 2010

That's not fair! The Australian Government reforms the law of unconscionable conduct

The ACCC is to be given greater powers to take action for breaches of the unconscionable conduct provisions in the new Australian Consumer Law, under changes in the new Competition and Consumer Legislation Amendment Bill 2010.

The Bill is intended to clarify and bolster the Australian Consumer Law's unconscionable conduct provisions, with particular reference to small business, and to invite the development of a "new" law for small business protection in this area, not limited by the traditional concept of unconscionable conduct.

This change comes hard upon the recent introduction in the Australian Consumer Law Act of "pecuniary penalties"- that is, civil fines - of up to $1.1 million for businesses engaging in unconscionable conduct.

Australia has never before recognised fines for this kind of conduct. Few if any other economies have developed a legal regime to this level in relation to harsh or unconscionable conduct.

Who does this affect?

The changes will be particularly important to franchising, shopping centre operators, or any large businesses that deal consistently with smaller business agents, distributors, or contractors.

They will also apply to consumers who are at risk of unconscionable conduct.

Unconscionable conduct reform – an invitation to innovate!

There is no definition in the Act of what is "unconscionable conduct", and the Bill will not change this.

The courts have noted that the traditional concept of unconscionable conduct draws on the unreasonable exploitation of a person who "by reason of some condition or circumstance is placed at a special disadvantage vis-à-vis another".

This Bill is intended to make it clear that for conduct to be "unconscionable" it is not necessary to identify, let alone prove, that there was a "special disadvantage" in any particular case, or even for a victim to have suffered loss.

Following an expert panel review in 2009, and a number of earlier inquiries into small business concerns, the Bill is intended:

  • to confirm that the new law is not to be read down or limited to the common law understanding of unconscionable conduct; and
  • to invite the courts to essentially develop a new doctrine of unconscionable conduct, unfettered by the common law.

An unconscionable "system"?

A list of factors will be added to the small business protections from unconscionable conduct in order to remove doubts about the broad application of these provisions.

For example, the law will be capable of applying to a "system" of conduct or pattern of behaviour, even if no particular individual is identified as having been disadvantaged by the conduct or behaviour.

This will make it easier for the ACCC to pursue a case against a business which has a "system" which, by its design or operation, is considered harsh and unconscionable, even if there is no clear instance of the system causing significant loss or harm.

An example of this might be a distribution system which is designed or managed in a way that it appears to consistently work to the disadvantage of small distributors or franchisees, but to the advantage of the stronger party. It might do this by exposing them to unreasonable business risks or unnecessary costs that they cannot avoid or guard against.

Unconscionable conduct in performing a contract - not only its making

The second reform is to apply the unconscionable conduct law to the manner in which a contract is performed or enforced – so that unconscionable conduct is not confined only to the pre-contractual stage of inducing a person to commit to the contract or the imposition of harsh terms.

This will widen the scope for plaintiffs to complain about the actual treatment they receive under the contract irrespective of its terms

What should clients do now?

The ACCC is likely to be on the prowl for some test cases over these provisions.

Any business which regularly deals with small business, or which has a system in place to deal with small business partners, should take the time now to do a review and cost benefit analysis of its contract and systems in place as follows:

  • are the contract and system procedures up to date and reflect the actual method of operation?
  • are the terms and systems clearly explained to counterparties both before they commit and during the relationship?
  • is there a forum for their legitimate concerns to be expressed and properly considered?
  • are there records kept of these exchanges and how concerns have been addressed?
  • is there consistency of treatment of similar small parties the business deals with?
  • does the system or contract unfairly impose costs on the counterparty which cannot be objectively justified?
  • are some small businesses economically dependent on the relationship with your business and if so, how is this "dependency" managed?
  • do your staff who deal with your small commercial parties understand the risks in this area and the legal requirements?

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.