The Current Legal Framework: A High and Demanding Threshold
Section 21 of the ACL prohibits unconscionable conduct in connection with the supply of goods or services in trade or commerce. The section sets out a non-exhaustive list of factors in section 22 that courts may consider, including the relative bargaining strengths of the parties, whether conditions were reasonably necessary to protect the legitimate interests of the stronger party, and whether the weaker party was given reasonable opportunity to understand the documents.
The threshold for unconscionable conduct under section 21 was established definitively by a line of High Court decisions. In Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51, the High Court confirmed that unconscionable conduct requires something more than conduct that is unfair or commercially unreasonable. In Thorne v Kennedy (2017) 263 CLR 85 and Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1, the High Court emphasised that the test is normative, not merely factual.
Conduct must be ‘outside societal norms of acceptable commercial behaviour [so] as to warrant condemnation as conduct that is offensive to conscience’ before it will be characterised as unconscionable.
AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2025] FCAFC 86 (Moshinsky, Bromwich and Anderson JJ) at [127], applying Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1
The Full Court in the Mercedes appeal confirmed that the statutory provisions do not require courts to apply abstract community standards but rather norms ‘recognised by the statute’: [2025] FCAFC 86 at [122]. The factors listed in section 22 of the ACL provide ‘express guidance as to the norms and values that are relevant’ to the assessment: at [138]. This is a statute-tethered standard, not a broad judicial discretion to intervene where conduct seems unfair.
The Franchising Code of Conduct adds a good-faith dealing obligation under clause 6. As the Mercedes litigation confirmed, that obligation requires honest performance but does not require a franchisor to subordinate its own commercial interests or forego the exercise of a contractual power of non-renewal. The Code was not designed to address fundamental restructuring of the franchise model.
The Mercedes-Benz Dealers Case: A $650 Million Illustration of the Gap
The definitive test of these limits came in AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022 (Beach J, 30 August 2023). In 2021, 38 of Mercedes-Benz Australia’s 49 dealers commenced proceedings, seeking approximately $650 million in compensation. The catalyst was Mercedes-Benz Australia/Pacific’s decision to transition from a traditional dealership model to a fixed-price agency model from 1 January 2022, without compensating dealers for the effective loss of their customer relationships and goodwill.
The dealers brought claims on four grounds: (i) unconscionable conduct under ACL section 21; (ii) breach of the good-faith obligation under the Franchising Code; (iii) appropriation of goodwill; and (iv) improper purpose in issuing the non-renewal notices (NRNs). Every claim failed.
On the non-renewal notices and good faith, Beach J held:
The very purpose of the non-renewal power is to bring the existing contractual bargain to an end. And the content of MBAuP’s obligation pursuant to any duty of good faith and to act with fidelity to the bargain between the parties is necessarily informed by the nature of the power which is to bring that bargain to an end.
AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022 (Beach J)
His Honour found that MBAuP had exercised the non-renewal power for the very purpose for which it was created: to bring each dealer agreement to an end. That exercise was faithful to the contractual bargain struck by the parties. The commercial assumption the dealers had made — that MBAuP would not issue non-renewal notices if dealers performed well — was a sensible assumption but was not the contractual bargain that had in fact been struck.
On unconscionable conduct, Beach J found:
The evidence does not establish any impermissible exploitation of an asymmetry of power that offends commercial conscience.
AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022 (Beach J)
His Honour acknowledged that the unconscionable conduct case had ‘greater merit than the applicants’ other claims and has involved a harder judgment call on my part.’ He concluded that MBAuP had a legitimate commercial interest in changing to the agency model uniformly across its network. What MBAuP did ‘was not outside the boundaries of the reasonable choices open to it consonant with its legitimate commercial interest.’ On compensation specifically, Beach J was direct:
It is not unconscionable not to offer compensation. There was no right. There was no appropriation. And there was no duress to sign the agency agreements.
AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022 (Beach J)
The Full Court of the Federal Court (Moshinsky, Bromwich and Anderson JJ) dismissed the dealers’ appeal on 9 July 2025: [2025] FCAFC 86. The Full Court confirmed the statute-tethered normative standard for unconscionable conduct and upheld Beach J’s analysis in its entirety. The High Court refused special leave on 6 November 2025: [2025] HCADisp 260, with costs. The litigation is completely at an end.
The Government’s Consultation Paper expressly states that had unfair trading practices protections been in place at the time, the outcome of the Mercedes case may well have been different. That acknowledgement — that the existing law failed the dealers — is the driving force behind the 2026 reforms.
The Competition and Consumer Amendment (Unfair Trading Practices) Bill 2026
The Bill introduces section 28B into the ACL: a person must not, in trade or commerce, engage in an unfair trading practice. The prohibition uses a two-limb test. Conduct contravenes the section where it: (1) unreasonably manipulates a consumer, or unreasonably distorts the environment in which a consumer makes a decision; and (2) causes, or is likely to cause, detriment to the consumer, whether financial or otherwise. Both limbs must be satisfied simultaneously.
This is a principles-based prohibition, not a checklist. The assessment is holistic: the nature of the conduct, the parties involved, the relevant market, and the effect on the other party are all relevant. The prohibition is deliberately designed to capture conduct that a court might find commercially hard, commercially damaging, and exploitative of a significant power imbalance — yet that currently falls short of the ‘offensive to conscience’ standard required for unconscionable conduct. It does not require dishonesty, trickery, or exploitation of special vulnerability.
The Bill also introduces specific prohibitions on subscription traps (concealed ongoing charges and obstructive cancellation processes), drip pricing (revealing mandatory fees progressively to obscure the true total cost), and dark patterns generally (false urgency, pre-selected checkboxes, obstructive design). Each specific prohibition operates independently of the general section 28B provision.
The penalty consequences are severe. For corporations, the maximum civil penalty is the greater of: $50 million; three times the benefit obtained from the conduct; or 30 per cent of the corporation’s adjusted turnover during the breach period. Individual officers may also face personal liability. The ACCC is the primary enforcement body, and private parties have independent litigation rights.
The Bill was introduced on 1 April 2026. If passed without amendment, it will commence on 1 July 2027 — approximately 14 months from introduction, giving businesses time to review practices and implement compliance frameworks.
The Critical Gap: Small Business and Franchising Are Not Yet Covered
The Bill as introduced applies to consumer transactions only. This is the critical limitation that the Government’s June 2026 Consultation Paper is designed to address. The Paper seeks feedback on whether, and in what form, the prohibition should be extended to business-to-business transactions involving small businesses and franchisees covered by the Franchising Code of Conduct.
Small business is proposed to be defined as a business with 100 or fewer employees or annual turnover of $10 million or less. Franchisees would be captured by virtue of their status under the Franchising Code, regardless of size. If the extension proceeds, conduct of the kind experienced by the Mercedes-Benz dealers — unilateral model changes, compensation offers under artificial time pressure, and network-wide restructuring without meaningful negotiation — would fall squarely within the two-limb test of the new prohibition.
The Australian Automotive Dealer Association made a submission expressly identifying these practices in the automotive sector. The Consultation Paper specifically references that submission. Submissions close on 10 July 2026.
What This Means for Your Business
For franchisees and small business operators, two immediate actions arise. First, consider making a submission to the June 2026 Consultation Paper before 10 July 2026. A submission grounded in actual commercial experience can materially influence the shape of the extension — which specific practices are expressly prohibited, how the good-faith obligation in the Franchising Code interacts with the new regime, and what evidential standards apply to establishing detriment.
Second, begin reviewing existing franchise and dealership arrangements against the likely shape of the incoming prohibition now, before 1 July 2027. Practices that have historically been permissible — including unilateral business model changes, artificial deadline pressure on compensation offers, and network-wide fee restructuring — will need to be assessed against the two-limb test once the extension is in place. Waiting until commencement to begin this review is commercially imprudent.
For franchisors, the reforms confirm that the legal environment that permitted the Mercedes-Benz transition without compensation will not persist. The Government has explicitly stated that the Mercedes outcome would have been different under the new framework. Franchisors who impose unilateral conditions, inadequate compensation within tight deadlines, or significant model changes without meaningful negotiation are on notice that those practices carry increasing legal risk.
For businesses already in a dispute involving conduct of the type described in the Consultation Paper, existing remedies under ACL sections 20 to 22 and the Franchising Code remain available now. Limitation periods apply regardless of incoming reform. Early advice is essential to preserve existing rights while positioning to take advantage of the incoming framework.
Disclaimer: This article is provided for general information purposes only and does not constitute legal advice. Specialised legal counsel should be sought for specific fact patterns.