Opinion: A new prohibition on ‘unconscionable conduct’ in trade is one of a number of changes to the Fair Trading Act 1986 that come into force from 16 August.

Despite its significance and the extent of its potential reach, it has garnered relatively little attention – perhaps because it has been introduced as part of a suite of other amendments to the Fair Trading Act (including the high-profile extension of ‘unfair contract terms’ to certain business contracts) and follows other recent changes to consumer and small business protections.

The new law will be relevant to businesses in a range of different contexts. It applies to all parties in trade, whether they deal with consumers or business counterparties, and can arise even where no contract is in place. It is also not possible to contract out of the prohibition (unlike certain other aspects of the Fair Trading Act).

The prohibition is very simply expressed in the legislation. The key provision states simply that “a person must not, in trade, engage in conduct that is unconscionable.” However, ‘unconscionable’ is not defined and it will therefore be left to the Courts to identity the appropriate scope of the new prohibition, and what types of conduct should be considered ‘unconscionable’.

What is clear from the background to the new law is that it is intended to apply only to serious misconduct that goes far beyond what is commercially necessary or appropriate. However, the standard is inherently subjective. Without clarification, the new prohibition may be prone to variable value judgments and inconsistent interpretations.

Unconscionable conduct will be a particularly relevant consideration where there is an imbalance of bargaining power, or where one party to a transaction is considered to be vulnerable in some regard (although it could potentially arise even in the absence of a disparity of bargaining power). It could apply to uncompromising or aggressive responses to complaints or customer disputes. It could even be relevant in a range of unexpected areas involving an asymmetry of information (such as in the use of algorithms, AI and biometrics).

The legislation is based on an equivalent ban under Australian law. The intention was that courts in New Zealand could draw on Australian cases to assist in understanding the scope of the prohibition. However, the experience of the Australian courts has shown just how difficult it is to identify a coherent and cohesive definition of unconscionable conduct.

Richard Massey, a senior associate and regulatory specialist for Bell Gully, says it will be important for all parties in trade to proceed cautiously as the new laws bed in. Photo: Supplied

In Australia, many of the cases approach the issue by looking at whether the relevant conduct is contrary to the ‘norms of society’. However, individual judges may have different interpretations of what societal norms exist.

Tellingly, many of the leading decisions by Australia’s highest courts are split decisions, with the judges disagreeing over whether the conduct that has been challenged is truly ‘unconscionable’.

This highlights the very difficult task which the new law creates. It requires the articulation of a common objective standard for a question on which individual views may vary widely: when is conduct in trade so egregious that it offends against conscience?

Ultimately, the Australian experience shows the application of the new prohibition will be highly context specific. The risk to a business will depend on the circumstances of each case, and how those particular details affect the sentiments of the presiding judge.

It will be important for all parties in trade to proceed cautiously as the new laws bed in – particularly when dealing with any vulnerable counterparties – and to remain alive to any developments in case law which have a bearing on their industry or commercial practices.

The Big Picture: Understanding the new prohibition on ‘unconscionable conduct’   Bell Gully is a foundation partner of Newsroom

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