Contracts are the backbone of commercial, personal, and professional relationships. Whether it’s a business agreement, a lease, a service contract, or a financial arrangement, both parties rely on the assumption that the terms are fair and that neither side will behave dishonestly. However, contract disputes often arise when one party feels they have been treated unfairly, pressured, misled, or exploited. Two of the most powerful doctrines used by courts to address such misconduct are unconscionability and bad faith.
Understanding Contract Fairness: Why These Doctrines Matter
Contract law is based on the idea of freedom of contract — meaning individuals are free to negotiate terms and enter agreements voluntarily. But this freedom isn’t unlimited. Courts recognise that unfair bargaining conditions, unequal power, or deceptive practices can result in agreements that no reasonable person should be bound to.
This is where unconscionability and bad faith come in.
Both doctrines serve as legal safeguards, ensuring contracts remain fair and that neither party abuses their position.
What Is Unconscionability?
Unconscionability refers to contract terms or conditions that are so unfair, oppressive, or one-sided that no reasonable or informed person would agree to them. Courts can refuse to enforce contracts — or specific clauses — that they determine to be unconscionable.
There are generally two types:
A. Procedural Unconscionability (Unfairness in the Process)
This focuses on how the contract was formed. Indicators include:
- Significant imbalance in bargaining power
- High-pressure sales tactics
- Failure to disclose key terms
- Fine print or complex legal language
- Lack of meaningful choice
- Surprise terms hidden within the contract
Procedural unconscionability looks at whether the weaker party truly understood and voluntarily agreed to the deal.
B. Substantive Unconscionability (Unfairness in the Terms)
This concerns the actual terms of the contract. A clause may be substantively unconscionable if it is:
- Excessively one-sided
- Harsh or oppressive
- Disproportionately punitive
- Lacking any commercial justification
Examples include very high late fees, overly strict penalties, or contract terms written solely to protect one party while disadvantaged the other.
Most courts require both procedural and substantive unconscionability, though the degree of each may vary. A highly unfair process may compensate for milder unfair terms and vice versa.
Examples of Unconscionable Contracts
Understanding the concept becomes easier through practical examples:
1. Predatory Loan Agreements
Lenders offering extremely high interest rates to financially vulnerable people, combined with misleading disclosures, are classic examples.
2. One-Sided Arbitration Clauses
A clause requiring only one party to use arbitration while the other retains the right to sue often signals unfairness.
3. Hidden Fees and Fine Print in Service Contracts
Terms buried in dense language that impose unreasonable fees or allow unilateral changes by the company.
4. Exploitative Employment Terms
Contracts that significantly limit a worker’s rights while imposing unreasonable obligations.
5. Take-It-or-Leave-It Contracts (Adhesion Contracts)
While not automatically unconscionable, these contracts raise suspicion when paired with exploitative terms.
Legal Tests for Unconscionability
Different jurisdictions apply varied tests, but common factors include:
- Inequality of bargaining power
- Absence of meaningful choice
- Unfair, surprising, or hidden terms
- Commercial reasonableness
- Whether terms violate public policy
- Whether the stronger party knowingly exploited a vulnerability
Judges evaluate the contract as a whole, the circumstances during signing, and the intention of parties.
If unconscionability is established, courts may:
- Refuse to enforce the entire contract
- Strike out only the unfair clause
- Modify the terms to make them reasonable
What Is Bad Faith in Contract Law?
While unconscionability focuses on unfairness in the contract’s formation or terms, bad faith deals with how parties behave during the performance or enforcement of the contract.
Most legal systems recognise an implied duty of good faith and fair dealing. This means parties must act:
- Honestly
- Fairly
- Cooperatively
- In a manner that upholds the contract’s purpose
Bad faith arises when a party deliberately undermines the agreement or acts dishonestly.
Common Forms of Bad Faith Conduct
Bad faith can occur before, during, or after the contract’s formation. Here are key examples:
A. Bad Faith in Negotiations
While not always actionable, certain behaviours may be considered bad faith:
- Misrepresenting facts
- Concealing vital information
- Intentionally misleading the other party
B. Bad Faith in Performance
This is the most common type and occurs when a party fails to act as the contract requires, even without explicitly breaching it.
Examples:
- Unreasonable delays
- Arbitrary refusals
- Sabotaging the performance of another party
- Interpreting terms in a hyper-technical way to avoid obligations
C. Bad Faith in Enforcement
This occurs when a party uses the contract as a weapon rather than a framework for cooperation.
Examples:
- Enforcing penalties disproportionate to harm
- Exercising rights with malicious intent
- Using technicalities to deny the other party’s benefits
How Courts Identify Bad Faith
Courts generally look for behaviour that:
- Lacks honesty or transparency
- Frustrates the purpose of the contract
- Causes harm or disadvantage to the other party
- Shows opportunistic exploitation
Unlike unconscionability, bad faith doesn’t require unfairness in the contract terms — only in how the parties act.
Differences Between Unconscionability & Bad Faith
Although both relate to fairness, they address different dimensions:
| Aspect | Unconscionability | Bad Faith |
| Focus | Fairness of contract terms or signing process | Conduct during negotiation, performance, or enforcement |
| Timing | Before or at signing | Before, during, or after the contract |
| Key Issue | Oppressive terms, imbalance of power | Dishonesty, obstruction, or malicious intent |
| Legal Remedy | Strike or modify clauses; void contract | Damages, enforcement orders, injunctions |
They often overlap but are judged through distinct legal tests.
Why These Doctrines Are Crucial in Modern Commercial Contracts
Today’s contracts are more complex, digital, and often non-negotiable. Online agreements, subscription models, loan contracts, and employment terms can contain:
- Dense fine print
- Optional disclosures
- Unilateral modification rights
- Restrictive clauses
This increases the risk of unconscionability claims, especially when consumers lack expertise or bargaining power.
Similarly, companies face growing scrutiny for bad faith practices such as:
- Misusing cancellation policies
- Manipulating service terms
- Denying legitimate warranty claims
- Obstructing contractual benefits
As courts push for accountability, both doctrines have gained prominence.
10. Real-World Scenarios Illustrating Unconscionability & Bad Faith
Scenario 1: Smartphone Contract with Hidden Early-Termination Charges
A telecom contract includes extremely high cancellation fees buried in fine print. The customer had no opportunity to negotiate.
This may be both procedurally and substantively unconscionable.
Scenario 2: A Supplier Delays Deliveries to Force Price Renegotiation
Here, the supplier is technically performing the contract but intentionally causing delays to gain leverage.
This reflects bad faith performance.
Scenario 3: Loan Agreement with Predatory Interest
A financially vulnerable borrower is pressured into signing a loan with a 60% interest rate.
This is substantively unconscionable.
Scenario 4: Using Penalties to Punish Instead of Compensate
A business partner imposes extreme penalties even though no harm occurred.
This may constitute bad faith enforcement.
Scenario 5: Digital Subscription That Is Easy to Sign Up but Hard to Cancel
If the cancellation process is intentionally obstructive or hidden, courts may find bad faith or even procedural unconscionability.
How Businesses Can Avoid Claims of Unconscionability
Businesses must ensure that their contracts are transparent, reasonable, and fair. Key practices include:
A. Provide Clear and Understandable Terms
Avoid burying important details in dense legal language. Highlight key terms such as:
- Fees
- Penalties
- Cancellation rights
- Automatic renewals
B. Offer Meaningful Choice
Even small opportunities to negotiate terms can protect against unconscionability claims.
C. Avoid Excessive or One-Sided Clauses
Ensure commercial justification for penalties or restrictive terms.
D. Improve Disclosure Practices
Use plain language summaries and ensure customers can easily review contracts before signing.
E. Train Staff to Avoid High-Pressure Tactics
Contract formation must be voluntary and informed.
How Parties Can Prevent Bad Faith Disputes
Preventing bad faith involves ongoing communication and consistent behaviour.
A. Act Honestly and Transparently
Provide accurate information and avoid concealing material facts.
B. Perform Contractual Obligations Reasonably
Even when terms allow discretion, it must be exercised fairly.
C. Document All Communications
Written records protect parties from false claims.
D. Cooperate to Fulfill the Contract’s Purpose
Courts reward parties who act in good faith and punish those who frustrate agreements.
E. Resolve Issues Early
Addressing misunderstandings promptly avoids escalations.
Legal Remedies for Unconscionability & Bad Faith
Courts have wide discretion. Remedies may include:
For Unconscionability
- Declaring the contract void
- Removing unfair clauses
- Modifying terms to reflect fairness
For Bad Faith
- Compensatory damages
- Punitive damages (in some jurisdictions)
- Specific performance orders
- Injunctions
- Contract termination
When to Seek Legal Advice
You should consult an attorney if:
- You feel pressured or misled during contract signing
- Contract terms seem unfair or unclear
- The other party is acting dishonestly
- You suspect hidden obligations or penalties
- A business partner is obstructing performance
Legal experts can analyse contracts, negotiate changes, and represent you in disputes.
Future Trends: Increasing Awareness & Digital Contracts
With AI-driven agreements, instant approvals, and automated renewals, the risk of unfair contract formation rises. Courts and legislatures are evolving to respond:
- Stronger consumer protection laws
- Stricter requirements for disclosure
- Regulations on digital contract fairness
- Emphasis on accountability for corporate misconduct
Unconscionability and bad faith will continue shaping modern contract law.
Conclusion
Unconscionability and bad faith are powerful doctrines designed to protect individuals and businesses from unfair treatment in contractual relationships. While unconscionability targets oppressive terms or unfair formation, bad faith addresses dishonest or harmful conduct throughout the contract’s lifecycle. Understanding these concepts helps parties create stronger, fairer agreements and avoid costly legal disputes.
By adopting transparent practices, acting honestly, and ensuring mutual respect, parties can enjoy healthier, more stable contractual relationships — and significantly reduce risks.
