What Is Unconscionable Conduct in Commercial Contracts and What Do Australian Businesses Need to Know?

Whether you’re just starting a small business or already operating an established enterprise, signing commercial contracts is an everyday reality. These contracts are essential for building relationships with suppliers, customers, partners, and service providers. But what happens if one side to the deal behaves so unfairly or takes such advantage that the law says the contract-or part of it-shouldn’t be enforced? In Australia, this is known as acting unconscionably.

Understanding what it means to act unconscionably is crucial for business owners. Not only does the law protect you from unfair conduct by others, but you also have responsibilities to avoid engaging in unconscionable conduct yourself. In this article, we’ll demystify unconscionable conduct in commercial contracts, explain what Australian courts look for, and help you ensure your business practices remain above board. If you want practical, actionable legal insights for your business, read on-we’re here to help.

What Does It Mean to Act Unconscionably in Australian Contract Law?

Let’s start with the basics: “unconscionably” refers to behaviour that is so harsh, exploitative, or one-sided that it goes against the standards of good conscience recognised by the courts. In simple terms, if one party uses their stronger position to impose terms or conduct that the other party could never reasonably agree to (or is tricked/coerced into), the law might declare that conduct unconscionable.

Australian law-especially the Australian Consumer Law (ACL)-gives the courts the power to step in and provide remedies when one party acts so unfairly that it shocks the conscience.

It’s important to know that not all unfair conduct is unconscionable. Unconscionability is reserved for conduct that is particularly egregious, exploitative, or oppressive. In the context of commercial contracts, courts look at everything from the negotiation process to the terms of the deal itself to decide if a business has acted unconscionably.

How Do Courts Decide If Conduct Is Unconscionable?

There is no single checklist for what makes conduct “unconscionable”, but courts consider a number of factors-often referred to as “indicia” or signposts. These factors help determine whether a business has crossed the line from tough bargaining into unacceptable behaviour.

Key Factors the Courts Consider

• Inequality of Power: Did one party clearly have more bargaining power or special knowledge than the other? Were they vulnerable for some reason (e.g., language barrier, financial distress, lack of business experience)?
• Unfair Pressure or Tactics: Was there any undue pressure, intimidation, or trickery? For example, using threats, rushing the other party, or taking advantage of a crisis.
• No Real Opportunity to Negotiate: Was the other party given time and information to understand the deal, including any complex or unusual terms?
• Lack of Understanding: Did one party struggle to understand the terms? Was there an opportunity to get independent advice?
• One-Sided Terms: Are the terms of the contract extremely unfair or heavily skewed in favour of one side?
• Personal Circumstances: Did one party exploit another person’s lack of education, language skills, age, illness, or distress?
• Breach of Industry Codes: Was the contract (or negotiation) inconsistent with industry standards or relevant codes of practice?

Remember, you don’t need every factor to be met-the courts take a holistic view. Each contract should be assessed on its own facts and circumstances.

Why Does Unconscionable Conduct Matter for Your Business?

If a court finds that a business has acted unconscionably-either during contract negotiations or in enforcing a contract-it can result in serious consequences. These might include:

• The contract (or offending parts) being set aside (not enforced)
• The business being ordered to pay compensation or make another remedy
• Reputation damage, legal costs, and loss of trust with partners or customers
• Penalties under the Australian Consumer Law, especially for repeat or systematic conduct

This means it’s not just about doing the right thing-it’s about protecting your bottom line and ensuring your contracts will stand up if challenged.

Common Scenarios of Unconscionable Conduct in Commercial Contracts

To bring the concept to life, let’s look at some practical examples that Australian businesses sometimes face:

• Lock-in Clauses and ‘Take It or Leave It’ Terms: Including harsh lock-in periods, automatically renewing contracts, or severe exit fees-especially if the other party didn’t have a chance to negotiate or get advice.
• Exploiting Weakness: A supplier notices a small business is in financial distress, and imposes one-sided payment terms or price increases that the business can’t refuse.
  
• Misuse of Confidential Information: Using information obtained in negotiations to pressure, intimidate, or coerce the other party into unfavourable terms.
• Non-Negotiable Standard Contracts: Using a ‘standard form’ contract that is heavily weighted in favour of one party (for example, big companies offering contracts to small businesses on a “sign or miss out” basis).

These scenarios don’t automatically mean unconscionable conduct has occurred, but they do raise red flags. Courts will look at whether, in the circumstances, your conduct crosses the line into being unconscionable.

What Does the Law Say About Unconscionable Conduct?

Several specific laws apply to unconscionable conduct in Australia:

• Australian Consumer Law (ACL): The ACL (contained in Schedule 2 of the Competition and Consumer Act 2010) prohibits unconscionable conduct in connection with supply or acquisition of goods or services, including commercial dealings.
• ASIC Act: The Australian Securities and Investments Commission Act 2001 covers unconscionable conduct in financial services and products.
• General Contract Law (Equity): Even where the ACL or ASIC Act don’t apply, courts may set aside contracts in equity if it would be unconscionable-especially where vulnerability, reliance, or disadvantage is present.

Because the ACL is the main law most small and medium businesses will need to comply with, let’s look at what it requires.

The ACL and Business-to-Business Conduct

Under section 21 of the ACL, it’s illegal to engage in unconscionable conduct when dealing with other businesses. While this originally focused on consumer protection, it’s now clear that small businesses, franchisees, and even larger enterprises are protected. The law applies not just to the main contract, but to all relevant conduct-pre-contract, during negotiations, and when enforcing or varying a contract.

You can read more about Section 21 of the Australian Consumer Law on our blog for a detailed breakdown.

Steps to Protect Your Business from Unconscionably Acting or Being Treated Unconscionably

Most business owners want to play fair, but it’s easy to unintentionally cross the line without realising. Here are some key steps you can take:

1. Ensure Transparent, Accessible Contract Terms

Contracts should be written in plain English wherever possible, with all fees, obligations, and limitations clearly explained. Avoid hidden fees and carefully consider if any term might seem excessively harsh or one-sided from the other party’s perspective.

2. Give Partners a Genuine Chance to Negotiate

Allow enough time for the other side to read, review, and consider any agreement. Encourage them to seek independent advice if needed-this reduces the risk that the agreement is later challenged as unconscionable.

3. Understand Power Imbalances

Be honest about any imbalances in business size, experience, or bargaining position. Don’t use your strength to push through terms that take excessive advantage of the other party’s situation, knowledge, or lack of support.

4. Stay Compliant with Codes and the Law

Make sure your contracts and dealings are consistent with the ACL, any industry code of conduct, and general business norms. If you’re unsure, get legal advice early-a short consultation can prevent expensive disputes in future.

5. Avoid Pressure, Threats, or Misleading Conduct

Forcing someone into a contract by threatening to pull the deal, giving them unreasonably short deadlines, or withholding key information is a classic warning sign of unconscionably behaving. Always act in good faith during contract negotiations.

Are There Related Legal Concepts to Unconscionable Conduct?

Yes-business owners often hear about several related concepts, such as:

• Misleading or Deceptive Conduct: Making false claims or omitting important facts (you can read more about this in our article on what is misrepresentation?).
• Unfair Contract Terms: These are prohibited under the ACL. A term doesn’t have to be unconscionable to be unfair-for example, terms that allow one side to change the contract unilaterally are often considered ‘unfair’ and may be struck out.
• Good Faith: Acting honestly and fairly in contractual dealings, even when there are no explicit rules about fairness.

While unconscionable conduct overlaps with these concepts, not every unfair or one-sided act is unconscionable. That’s why it’s good practice to ensure your contracts are robust and regularly reviewed for potential risks.

What Legal Documents and Processes Can Help Prevent Claims of Unconscionable Conduct?

Setting up your commercial contracts the right way is your strongest defence. Consider working with a legal expert to develop and review the following documents:

• Commercial Contracts: Your customer, supplier, and service agreements should be tailored, transparent, and fair. Consider using a Customer Contract template for clear terms.
• Terms and Conditions: Outline precisely how your products or services are delivered, what fees apply, your cancellation and refund policies, and what happens if a dispute arises.
• Privacy Policy: If you handle customer or partner information, be upfront about how you use and protect data (learn more in our Privacy Policy guide).
• Employment or Contractor Agreements: For staff and outsourcing, agreements should spell out rights and responsibilities. These templates should comply with Fair Work and avoid exploitative conditions. Check our Employment Contract service.
• Shareholders Agreement: If you have business partners, this document helps clarify decision-making and dispute resolution so no one is unfairly squeezed out or left in the dark (Shareholders Agreement explained).
• Contract Review Services: If you’re presented with a contract by someone else, having an expert review the terms can spot risks and help you negotiate before signing (Contract Review services).

Having contracts drafted or reviewed by legal professionals is a smart investment. Each business is unique, so a tailored approach is always best.

What Should I Do If I Think I’ve Been Treated Unconscionably?

If you believe the other party to a contract has acted unconscionably with your business-such as by misleading, exploiting, or forcing you into extremely unfair terms-it’s important to act quickly. Here’s what you can do:

• Gather all relevant documents (contracts, emails, messages, etc.).
• Document what happened and when, including any discussions, pressures, or special circumstances.
• Seek legal advice about your options. Depending on the case, you might be able to set aside all or part of the contract, claim compensation, or lodge a complaint with the ACCC or state-based fair trading body.

Timeframes can be strict, so don’t delay if you think you’ve been treated unconscionably.

Key Takeaways

• Australian law prohibits acting unconscionably in commercial contracts-conduct that is harsh, exploitative, or oppressive can be legally challenged even between businesses.
• The courts look at the bargaining process, the terms of the deal, and each party’s circumstances to decide if conduct is unconscionable.
• Unconscionable conduct can lead to contracts being set aside, financial penalties, and reputational harm.
• Protect your business by using transparent contracts, giving others time to negotiate, and seeking legal review for your agreements.
• If you suspect you’ve been treated unconscionably, seek legal support as soon as possible to preserve your rights.
• Having the right legal documents-like customer contracts, privacy policies, and employment agreements-will help ensure your business is compliant and defendable.

If you need legal help understanding your obligations or want a review of your commercial contracts to ensure you’re not acting unconscionably, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.