7.3.1 Unconscionability

Unconscionability is a long-standing doctrine established by the courts in their equitable jurisdiction to provide a just outcome where other legal concepts such as duress, fraud or mistake do not provide adequate relief. Unconscionability applies where the courts consider it is unfair or inequitable to allow a party to enforce its contractual rights. The word “unconscionable” includes the element of a party acting without a conscience, and it has the flavour of being immoral, unethical or unfair.

In practice the legal test for unconscionability is difficult to meet. Essentially a stronger party needs to be found to have taken advantage of a weaker party, to an extent which is “against good conscience”.

The most recent authoritative summary of the principles of unconscionability from the New Zealand courts was set out by Arnold J in Gustav v Macfield (Court of Appeal, subsequently endorsed by the Supreme Court)⁴¹. The statement is a sufficiently authoritative and comprehensive summary of the current law of unconscionability in New Zealand that it is worth setting out in full (even though Arnold J commented in the judgment that the summary of principles is not in fact exhaustive),

1. Equity will intervene to relieve a party from the rigours of the common law [i.e. technically enforceable contracts] in respect of an unconscionable bargain.

2. This equitable jurisdiction is not intended to relieve parties from “hard” bargains or to save the foolish from their foolishness. Rather, the jurisdiction operates to protect those who enter into bargains where they are under a significant disability or disadvantage from exploitation.

3. A qualifying disability or disadvantage does not arise simply from an inequality of bargaining power. Rather, it is a condition or characteristic which significantly diminishes a party’s ability to assess his or her best interests. It is an open-ended concept. Characteristics that are likely to constitute a qualifying disability or disadvantage are ignorance, lack of education, illness, age, mental or physical infirmity, stress or anxiety, but other characteristics may also qualify depending upon the circumstances of the case.

4. If one party is under a qualifying disability or disadvantage (the weaker party), the focus shifts to the conduct of the other party (the stronger party). The essential question is whether in the particular circumstances it is unconscionable to permit the stronger party to take the benefit of the bargain.

5. Before a finding of unconscionability will be made, the stronger party must know of the weaker party’s disability or disadvantage and must “take advantage” of that disability or disadvantage.

6. The requisite knowledge may be that of the principal or an agent, and may be actual or constructive [i.e. deemed or assumed]. Factors associated with the substance of the transaction (for example, a marked imbalance in consideration) or the way in which a transaction was concluded (for example, the failure of one party to receive independent advice in relation to a significant transaction) may lead to a finding that the stronger party had constructive knowledge. So, in the particular circumstances the stronger party may be put on enquiry, and in the absence of such enquiry, may be treated as if he or she knew of the disability or disadvantage.

7. “Taking advantage of” (or victimisation) in this context encompasses both the active extraction and the passive acceptance of a benefit. Accordingly, as Tipping J said in Bowkett at 457, an unconscionable victimisation will occur where there are:

8. ‘… circumstances which are either known or which ought to be known to the stronger party in which he has an obligation in equity to say to the weaker party: no, I cannot in all good conscience accept the benefit of this transaction in these circumstances either at all or unless you have full independent advice.’⁴²

9. If these conditions are met, the burden falls on the stronger party to show that the transaction was a fair and reasonable one and should therefore be upheld.

The application of these tests for unconscionability is always going to be very fact-specific, which is reflected in Arnold J’s comment that the categories of disability or disadvantage are open-ended, and may include other circumstances which have not yet been encountered. The fact that stronger parties may be held to have acted unconscionably when they are not actually aware of the disability or disadvantage of the person they are dealing with shows that the courts will be flexible in the application of the doctrine. Having said that though, the courts are consistently clear that unconscionability is not about rescuing people from the hard or otherwise foolish bargains they might have entered into.

One of the features of the doctrine of unconscionability is that it only applies as a defence in court where the “stronger” party is seeking to enforce a contract. Unconscionability is “remedial”, but there is no positive legal obligation under the case law on anyone not to act unconscionably.

Another limitation is that the unconscionability cases which come before the courts usually concern relatively high-value transactions. For example, the Gustav case concerned a property developer with terminal cancer entering into a contract to purchase land for $12.5 million. The Bowkett case also had a commercial aspect, because an elderly couple mortgaged their property to secure the business debts of their son.

Unconscionability is less likely to apply in conventional consumer law situations. Part of the reason is that lower-value transactions are rarely litigated and unconscionability is a case law concept. The threshold tests for disadvantage or disability are also difficult to meet in relatively low-value consumer cases.

The Disputes Tribunal has jurisdiction under section 19 of the Disputes Tribunal Act 1988 to vary or set aside agreements which are (among other things) unconscionable. The previous Principal Referee of the Disputes Tribunal noted that in 5,000 cases, only two consumers were successful in establishing unconscionable conduct in the Disputes Tribunal⁴³. Many of the Disputes Tribunal cases would have resulted in remedies for consumers under the Fair Trading Act, Consumer Guarantees Act, or common law-based contract law, but the low number of findings of unconscionability suggests the utility of the doctrine is limited for low-value disputes.

Another reason why the utility of the unconscionability doctrine is limited is that it only applies to the formation of contracts, and it does not apply to the conduct or decisions that a stronger party might make during the course of the contract. A stronger party might behave unfairly in dealing with a complaint, for example, but that will never strictly be unconscionable under the case law, because it does not relate to the formation of the contract. This distinction is often described as being the difference between “procedural unconscionability” and “substantive unconscionability”, and the courts have tended to focus on procedural unconscionability when they have considered the cases before them. Substantive unconscionability leads to a consideration of the overall fairness of the outcome of contracts, and the courts have been reluctant to make decisions on this basis.

Unconscionability and the Australian Trade Practices Act

Unconscionability sections have been added to the Australian Trade Practices Act over time. The intention has been to address some of the limitations of the unconscionability remedy under the case law by creating a positive legal obligation, and providing a statutory indication of the scope of unconscionability. There are three relevant provisions in the Trade Practices Act:

• Section 51AA prohibits conduct that is unconscionable within the meaning of the “unwritten law of the States and Territories”. This section was added in 1992.
• Section 51AB prohibits engaging in conduct in connection with the supply of goods or services to a person that is, in all the circumstances, unconscionable. This section was added in 1986.
• Section 51AC prohibits conduct that is, in all the circumstances, unconscionable in connection with the supply or acquisition of goods or services to or from a corporation. This section was added in 1998.

Section 51AA creates a positive legal obligation not to act unconscionably, and opens up the statutory remedies available for a breach of the Trade Practices Act, including pecuniary penalties⁴⁴. The effect of section 51AA has been to address two of the fundamental weaknesses of the unconscionability doctrine (i.e. only remedial, and lacking a full range of remedies), while retaining the flexibility for the courts to develop the underlying concept. In practice section 51AA has done nothing to change or extend the meaning of unconscionability as a case law concept.

Section 51AB interestingly includes a list of the factors the courts may consider in determining whether particular conduct of a person supplying goods or services has been unconscionable. There has been a debate in Australia as to how far section 51AB was intended to extend the meaning of unconscionable conduct, assuming that it must extend the meaning of the case law concept, at least to some extent. Section 51AB is clearly grounded in the existing concept of unconscionability. In particular the list of factors included in section 51AB all relate to the formation of the contract, so section 51AB is limited to procedural unconscionability, and does not open up the wider scope of substantive unconscionability.

Arguably section 51AB does not add any more to the law than section 51AA, although usually case law-based unconscionability cases concern financial products (loans and guarantees in particular) or dealing with land. Applying unconscionability to the supply of goods and services may be an extension of the doctrine into a new area without materially changing the underlying definition of unconscionability. The reference to the courts making decisions in the cases that are “in all the circumstances unconscionable” reinforces that the application of the doctrine remains very fact-specific.

The later addition of section 51AC was intended to make it clear that the remedies for unconscionable conduct are available to companies (other than public listed companies). Section 51AC is specifically intended to apply in commercial contexts, and to protect businesses dealing with “stronger” suppliers or customers. Section 51AC uses the expression “business consumer” when it lists the factors the courts may consider, and describes the parties it is designed to protect. Business consumers might have had access to remedies under sections 51AA and 51AB in the appropriate circumstances, but section 51AC makes it crystal clear that they are intended to have access to unconscionability remedies which may not have been available under the case law. The factors listed for the courts to take into account when they are considering potentially unconscionable conduct towards business consumers are noticeably broader and have a more commercial emphasis than the factors listed under section 51AB.

The Australians have recently been considering whether the provisions dealing with unconscionability in the Trade Practices Act have been effective. Unconscionability is still a high threshold to achieve, especially in relation to the supply of goods and services.

igh-level cases clarifying the coverage of the statutory provisions and the extent to which they have expanded the case law principles have been relatively rare, especially in relation to section 51AC. The courts in Australia have generally been reluctant to take the opportunity to broaden the application of the doctrine of unconscionability, and they remain focussed on procedural unconscionability rather than venturing more widely into the conduct of parties under contracts and substantive unconscionability.

When the Senate Economics Committee considered the Australian Consumer Law in December 2008, it recommended that the provisions in the Trade Practices Act should be amended to make it clear that the “terms and progress” of contracts may be relevant to unconscionability, as well as the circumstances of the formation of the contract. The Commonwealth Government has accepted this recommendation, and sections 51AA, AB and AC of the Trade Practices Act are being re-enacted and amended⁴⁵. The new provisions will make it clearer that the legislation is intended to expand the case law doctrine of unconscionability.

Issues for New Zealand

Unconscionability remains largely a case law concept in New Zealand. There are no provisions in the Fair Trading Act which match those in the Trade Practices Act, despite the Fair Trading Act having largely been taken from the Trade Practices Act. The primary issue for New Zealand in this area is therefore whether there is any merit in including provisions prohibiting unconscionable conduct in the Fair Trading Act.

There are consumers who are vulnerable, and who may agree to contracts with stronger parties who take advantage of their vulnerability or disadvantage. Small businesses may also be dealt with unconscionably by more powerful suppliers or customers. The issue is whether amending the Fair Trading Act to prohibit and create remedies against unconscionable conduct would create new or better rights for vulnerable consumers and small businesses.

The fact that consumers and small businesses could initiate their own civil action with potential remedies against unconscionable traders, and that the Commerce Commission could enforce a prohibition on unconscionable conduct with possible pecuniary penalties, would obviously create new legal rights and remedies. The actions might be available where there are no existing legal remedies.

An example the Ministry of Consumer Affairs is aware of concerned a consumer who was interested in buying a car. She browsed the internet and found a trader apparently in her home town. On contacting the trader, they told her they did not have a physical address in her town but could drive her to another town (2.5 hours away) where they had a car yard. She agreed to this and was duly driven to the car yard. After several hours of looking at cars, she indicated that none met her needs, and that she had to get home to pick up a child from childcare. The trader then pointed out the bus stop and told her to catch the bus home as she had wasted their time. The consumer did not have enough cash to purchase a bus ticket and would have been late to pick up her child, so she relented and signed a finance contract to purchase a car so that she could drive back to her home town.

It is interesting whether the consumer in this case would have been under a sufficient disadvantage or vulnerability to be protected by the doctrine of unconscionability. She does seem to have signed a contract for a car which she did not want, and the trader does seem to have acted “against good conscience”. Exploiting stress or anxiety is one of the characteristics of unconscionable conduct referred to in the Gustav case. Whether the trader had gone so far as to have been unconscionable according to the legal test would depend on how much the trader knew (or ought to have known) about the consumer’s situation, and whether or not the consumer might have had alternatives apart from buying the car. The example therefore illustrates the problem with unconscionability being uncertain, and fact-specific, even when a trader has obviously acted badly.

The inclusion of unconscionability in the Fair Trading Act would mean that the Commerce Commission would need to decide whether to pursue the complaints it receives and enforce the provisions in the courts.

It could also create additional civil law remedies for people who considered they have been dealt with unconscionably, and who have only previously been able to use the case law doctrine of unconscionability as a defence if they are sued.

The parties who are most likely to benefit from including unconscionability in the Fair Trading Act along the lines of the Australian provisions are small businesses which find themselves at a commercial disadvantage against larger suppliers or customers. Small businesses can be as vulnerable as other consumers, and they may be more prepared to pursue their legal rights than private individuals. The use of the Fair Trading Act by businesses to protect their commercial interests is already a feature of the law, so creating additional rights which small businesses will use is consistent with the general approach of the Fair Trading Act.

Footnotes

41 Gustav & Co Ltd v Macfield Ltd [2007] NZCA 205 (Court of Appeal), and [2008] 2NZLR 735 (Supreme Court). 

42 Bowkett v Action Finance Limited [1992] 1 NZLR 449.

43 Personal communication from Peter Spiller to Ministry of Consumer Affairs, October 2008.

44 In New Zealand, the criminal remedies in cases brought by the Commerce Commission under the Fair Trading Act include fines and additional penalties to recover any illicit gains (sections 40 and 40A), but the financial remedies in civil cases are limited to loss or damage (section 43).

45 Trade Practices Amendment (Australian Consumer Law) Bill (No.2) 2010