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Unconscionable contract Essay

Custom Student Mr. Teacher ENG 1001-04 20 July 2016

Unconscionable contract


In the past fifteen years the concept of unconscionablitity has become a significant theme in the Australian law of contract. Liberal theories, which locate freedom of contract as central, have been tempered by an increasing emphasis on justice and conscionable conduct in contractual relations. Virginia courts have defined an unconscionable contract to be “one that no man in his senses and not under a delusion would make, on the one hand, and as no fair man would accept, on the other.” In other words, the inequality present in the contract must be so gross as to “shock the conscience.” The landscape for business in Australia has been dramatically altered in recent years by the legislative prohibitions of misrepresentation, undue influence and, in limited cases, unconscionable conduct.

Lord Denning – “Unconscionable contract”

Unconscionable contract was first developed by Lord Denning. Followings are circumstances that diverge with his thinking and the concept of conscionability need to be taken into consideration.

In the court case Lloyd’s Bank Ltd v Bundy [1975] QB 326,336 Lord Denning was attempting to identify an underlying “unconscionability” principle based on inequality of bargaining power.

Lloyd’s Bank Ltd v Bundy [1975] QB 326,336 is a case, which an elderly father gave the family farm as security for operating a business under the son’s management. However the father did not know the business was in serious trouble, and the bank manager did not disclose this information to Mr. Bundy while he obtained Mr. Bundy’s signature.

Mr. Bundy, a long time customer of the bank, naive and tractable in financial matters and anxious to stand behind his only son, looked to the manager for advice and assistance. The farm had been in Mr. Bundy’s family for generations; it was his only significant asset, and very important to him. The bank manager, completely aware of Mr. Bundy’s situation, did not entirely disclose the risks involved in the transaction, and thus Bundy suffered the disadvantage as a result of inequality of bargaining power betweenthe bank and a customer.

Lord Denning stated in that case:

“By virtue of ‘inequality of bargaining power’, the English law gives relief to one who, without independent advice, enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infancy, coupled with undue influence or pressures brought to bear on him by or for the benefit of others”

Denning believed in conscionability and had based his decision in favour of Mr. Bundy on a broader principle than that adopted by the other members of the Court of Appeal. However, his approach had not been followed and indeed was specifically disapproved by Lord Scarman in National Westminster Bank v Morgan (1985).

From the above case, it disclosed that the courts will set aside a contract, or transfer of property, when the parties involves in the contract have not met on equal; which means that when the one is so stronger in bargaining power and the other so weak, the concept of inequality of bargaining.

Lord Denning’s belief

According to the case of Lloyds Bank Ltd v Bundy [1975] QB 326,336, Lord Denning concluded five categories that is related, they are:

1. Duress of goods. It typically means one person has a stronger bargaining position by being in possession of the goods of another person, who is in a weak position with a urgent need, by the way of pawn or pledge.

2. Unconscionable transaction. Due to special disability, such as age, young, or ignorant, a person exploited his property at a gross undervalue by the one who has far stronger bargaining power than him.

3. Undue influence. This can be divided into two parts. Firstly, the one who are in stronger position gain advantage from the weaker due to guilty of some fraud or wrongful act. Secondly, there are existed a relationship between the stronger and weaker, for example, parent over child, doctor over patient, etc.

4. Undue pressure. It occurs when one party (stronger) stipulates for an unfair advantage to the one (weaker) who has no option but to submit.

5. Salvage agreements. The position between the weaker-vessel and strong-rescuer. In this case, if the agreement between them is too unfair and unjust, the court will decree what is fair and just.

Lord Denning expressed his thought about unconscionability. He avoided the possibility of one’s interest that will be “dominated” or “overcome” by the other, who has a strong bargaining power, in order to gain unfair advantages.

Law of Australia – “Unconscionable contract”

For a multicultural and beliefs exist simultaneously in a society such as Australia, conscionability is so imperative that it needs to be taken into account and in legislating laws. Australian legislative institution has adopted unconscionable contract, the major intention is to ensure undue influence being taken away and construct a society with equitable, fair and just. Followings are legislations help explain how unconscionable contract has penetrated into and become part of the law in Australia.

The position in Australia is the same as that in England. It is exemplified by the decision of the High Court in Commercial Bank of Australia Ltd v Amadio (1983) 152 CLR 447, where parents of a customer of the Bank signed a mortgage and guarantee at the bank’s request without the benefit of independent advice and in the belief that it secured advances to their son of $50,000 for 6 months. Soon after, the son’s business failed and the bank claimed $270,000 from the parents. They argued that the Bank’s conduct was unconscionable, and the High Court agreed that it was.

This was the case of an unconscionable bargain of the kind which equity would set aside, even in the absence of fraud, misrepresentation or undue influence. Of course, the bank and the respondents did not meet on equal terms, but the circumstance alone does not call for the intervention of equity, as Lord Denning clearly illustrated in Lloyds’ Bank v Bundy [1975] QB 326,336. A transaction will be unconscionable within the meaning of the relevant equitable principles only if the party seeking to enforce the transaction has taken unfair advantage of his own superior bargaining power, or of the position of disadvantage in which the other party was placed.

Contracts Review Act 1980 (NSW)

As previous stated, Lord Denning had argued the Counts had power to set aside the contracts that were unconscionable. After the Report on Harsh and unconscionable contracts, it leaded new legislation on Contracts Review Act 1980 (NSW).

The pivotal provision of the Contracts Review Act does two things:

1. It describes the criterion by which the operation of the Act is activated, namely, a contract or a provision of a contract, which is ‘unjust’. ‘Unjust’ includes ‘unconscionable, harsh or oppressive’ and ‘injustice’ is construed in a corresponding way.

2. It sets out the relief, which may be granted in respect of an unjust contract or provision.

The term ‘unjust’ was selected in preference to ‘harsh and unconscionable’ in order to avoid any suggestion that the Act should be interpreted narrowly or in accordance with previous case lase on that expression in earlier legislation.

Trade Practice Act – PartIVA

Although one of the express objects of the TPA (Trade Practices Act) is to promote the protection of consumers, it was not until 1986 that provisions were inserted to address with unconscionability. During that time, TPA generally covers consumer & business protection as well as anti-competitive conduct and restrictive trade practices (eg abuse of market power) and starting to require banks & other commercial parties to look beyond their own self-interest and to have some regard for the interests of others.

Against the background of numerous parliamentary debates and reports by various government committees, sections 51AA and 51AB of the TPA were introduced in1992.

® Section 51AA stated the “General Unconscionability”, it prohibits conduct by a corporation that is unconscionable within the meaning of the “unwritten law” and applies to situations of “special disadvantage”, where one commercial party exploits another’s disadvantage.

® Section 51AB discloses Consumer Unconscionability, which goes beyond the common law; and regulates unconscionable conduct in consumer tractions, but its limited to the supply of goods or service that for personal, household, or domestic use or consumption.

® Section 51AB(2) emphasis on relative bargaining positions, which prevent the occurrence of undue influence or unfair tactics used and ensure price of equivalent goods or service.

® Section 51AC was introduced in mid-1998, which is mainly used to help small business. And it has extended the unconscionable conduct provisions of the TPA to business transactions involving supply or acquisition of goods or services.

Illustrate with recent case.

Subsequent cases are illustrations how individuals in reality apply unconscionable contract into their business operations.

Case 1

Karam v ANZ Banking Group Limited (2001)

Plaintiffs: Karams’ family

Defendant: Australia & New Zealand Banking Group Limited

In this proceeding, the Karams, two brothers and their wives claim that the ANZ Bank acted unconscionably in obtaining various guarantees and securities from the Karams. This was so as to support obligations of their incorporated family business in a way and extent that the Karams contend was not understood. The Karams contend that they laboured under the special disability of having limited education and understanding of technical English and inadequate financial understanding. They contend that they received inadequate or misleading explanation from the Bank concerning the availability of their security for the Company’s indebtedness.

In addition, Karams stated that the ANZ Bank took unfair advantage of their disability in seeking to obtain and then retain the advantage of that security for the Company’s bank indebtedness. Thereafter, say the Karams, the Bank applied illegitimate pressure amounting to economic duress in order to retain that benefit unconscionably obtained. They complained that the Bank gave advice or made recommendations to the Karams, which rendered it liable to them as customers for negligence, misrepresentation or breach of fiduciary duty. Therefore, due to the Bank’s advice, it leaded them to make a wrong financial decision and so they started to bear the heavy debt burden.

Case 2

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003)

Appellant: Australian Competition and Consumer Commission

Respondent: CG Berbatis Holdings Pty Limited

This case is about the lessors of premises in a shopping centre engaged in conduct that was “unconscionable within the meaning of the unwritten law” in stipulating, as a condition of their consent to a proposed renewal or extension of a lease, in contemplation of its assignment, a requirement that the lessees would abandon certain claims against them. The lessees were in a difficult bargaining position. They had no option to renew their lease. Their prospects of making an advantageous sale of their business depended upon the co-operation of the lessors, which they were not obliged to give. The appellant, the Australian Competition and Consumer Commission, claims that the lessors’ conduct was unconscionable, the lessees never sought to have the deed they entered into with the lessors set aside.

Case 3

Minister for Industrial Affairs v Civil Tech Pty Ltd and Tozer (1999)

Plaintiffs: Minister for Industrial Affairs

Defendant: Civil Tech Pty Ltd and Tozer

Disputes arose between the Minister and Civil Tech relating to the entitlements of Civil Tech under the contract. The disputes were referred to arbitration. The arbitration commenced on 1 February 1995 when a preliminary conference was held. The hearing of the respective claims and counterclaims did not begin until 23 September 1996. Later, the arbitrator delivered an interim award concerning the issue whether Civil Tech was bound by a document called “the letter of release”. By that letter Civil Tech had agreed to accept a payment of $343,440 in full settlement of its claim for removal of certain obstructions, which had been encountered in the work and for consequential delays and had released the Minister from its claims.

The arbitrator decided that the letter of release was avoidable on several grounds, namely, economic duress, unconscionability and absence of accord and satisfaction. In his reasons the arbitrator also found that the letter of release was voidable on the grounds of common mistake and misrepresentation, grounds that had not been pleaded by Civil Tech. The Minister sought leave to appeal from the interim award. Leave to appeal was refused. The Minister then obtained from the Full Court leave to appeal from the decision refusing leave to appeal.

What are the circumstances when it can be used?

Subsequent circumstances can be used as a guidance which direct people to use the contract properly and appropriately.

Unconscionable contract is a contract which no man in his senses, not under delusion, would make, on the one hand, and which no fair and honest man would accept, on the other. (Allan 1992)

Unconscionability is to take unfair advantage of another person’s position of weakness usually caused by some disadvantage or disability. Any contract so formed may be set aside by a court if requested by the person taken advantage of.

In practice, this is often very difficult to ascertain unconscionability because the law accepts commercial transaction sometimes can be unfair to a party, for instance, the contract is signed and agreed with party’s eyes open, and it later proves to be a hard bargain, the courts are improbable to intervene in such transaction.

To prove ‘unconscionability’ which amounts to a breach of trade practices law the weaker party must establish that it was in a position of special disability which the stronger party knew about (or should have known about) and that the stronger party took unfair advantage of the position. If one of these elements is missing then unconscionable conduct cannot be proved even if one business is going to suffer a big loss. (Seddon 1997)

Therefore, to judge a weaker party was in a position of special disability, it is necessary to define special disability; otherwise, unconscionability will not come into existence.

The circumstances, which may constitute special disadvantage, include “poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education and lack of assistance or explanation where assistance or explanation is necessary”. These examples are merely illustrative. Often a combination of these factors will be used to determine unconscionability. However, a mere disparity in bargaining power between the parties is not considered to constitute a ‘special disability’. (Seddon 1997)

Under Common Law of Australia, courts have traditionally set aside, in whole or in part, contracts held to be unconscionable. Unconscionable conduct applies in situations where the guarantor is under a special disadvantage or disability in relation to the other parties to the transaction so that there is “an absence of any reasonable degree of equality between them”. Certain relationships are considered more likely to give rise to unconscientious dealing. One of the classic statements is that of Justice Fullagar of the High Court:

The circumstances adversely affecting a party … are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, and sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other. (Treitel 1995)

Hence, unconscionable contract is applied to the circumstances where the strong party takes unjust advantage of weak party position of special disability that influenced the weak party to engage in a contract. This is to say; a contract may be entered into because one party has engaged in unconscionable conduct in order to influence the other to enter into the contract.

When it comes to the determination of who can bring in action, consumers would be the first consideration. Consumer is dined in subsections (5) and (6), which are from the Trade Practice Act (1974). They typically lack bargaining power in their transactions with suppliers of goods and services is widely acknowledge today, who could be suffered an unreasonable contract with the clauses that are difficult to understand and imparity position between their and the oppose party. Some of the people in this situation who are uneducated so that they are easier to fall the pitfall, made the agreement with the businesses or corporations with misleading and misunderstood of the contract.

For example, people buy tickets from whatever organization, once they bought the ticket meant that they accepted the contract, which is often contractual language in fine print on the back of the ticket, but most of the time the purchasers do not know what is the contract of the tickets about, only when they suffer loss or injury because of the organization who issued the tickets for purchasers, the purchasers become to know they maybe suffer an unconscionable contract.

The case is that Commercial Bank of Australia v Amadio, Amadio who is the managing director of Amadio Builder Pty.Ltd. In order to secure overdraft account, he told and persuaded his parents to mortgage their house, and said the house is limited to $50,000 for six months. Because his parents are not good with English and they believed their son is running the company well, so they agree with his son’s requirement, and then sign a mortgage document that includes a guarantee binding them to cover all the company’s bank debts. However, the bank knew that the company was unable to pay off the debt, and the bank manager also knew that Amadio’s parents with limited liabilities to pay the debt, but through the story, the bank manager did not tell his parents even mention that clause.

Soon after, Amadio’s company failed and the bank followed the contract to auction his parents’ house. In this case, the court though the bank acted unconscionably pursuant to the unwritten law of the State and Territories. The parents were under a ‘special disability’ in their dealings with the bank. (‘Special’ suggests, not only disability in one party will result in the other party’s conduct being unconscionable. The disability must seriously affect the ability of the weaker party to decide whether the contract is fair and equal to each party.) However, when a corporation are dealing with a person with ‘special disability’ and do not explain the clauses properly, that corporation will engage in unconscionable conduct due to they know the people have ‘special disability’ and take unfair advantage of its superior position or bargaining power.

Here are some of the things a court might do to remedy a clause or contract that it finds to be unconscionable (Trade Practice Act 1974):

“a. Refusal to enforce clause: Most likely, the court will simply strike the offending clause, but enforce the rest of the contract;

Some of the unconscionable contract that the clauses are not fully cheated and pitfall, so usually, the court will reset the unfair clauses and then remain the rest of the clauses in the contract.

b. Reformation: Alternatively, the court may “reform” the offending clause (e.g., by modifying an excessive price to make it a reasonable price);

A typical example of excessive price is that once the consumer bought the washing machine in a retailer store, agreed to pay the machine by monthly installment, the machine was sold $696 by the retail store, the monthly installment is $89 monthly. After the consumer paid the first installment, the retailer sent the machine to the consumer’s place, but a week later, that consumer found that the same machine with same standard sold by another retail store with $269, so that consumer thought that he was cheated, so he came back to that retail store and asked whether he could refund or the manager of retail store reduce the price in line of the other stores. So this contract is though to be an unconscionable contract with excessive price, it needs to make it a reasonable price.

c. Refusal to enforce whole contract: Very occasionally, the court may simply refuse to enforce the entire contract, denying P any recovery at all.”

General speaking, the court will not cancel the whole contract only when the whole contract is different to reset to be fair to both parties, so the court need to refuse the original contract, but usually not to do that.

(b) Inequality of bargaining power: Lloyds Bank Ltd. v. Bundy (1975) Q.B. 326, where Denning wrote: “Gathering all together, I would suggest that through all these instances there runs a single thread. They rest on ‘inequality of bargaining power’. By virtue of it, the English law gives relief to one who, without independent advice, enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infancy, coupled with undue influence or pressures brought to bear on him by or for the benefit of others”.

In later cases, the House of Lords preferred to confine the principle within the bounds of undue influence, although it was conceded that in some cases of undue influence an unequal bargain could be a relevant factor. In National Westminster Bank Ltd. v. Morgan (1985) 1 WLR. 589, Lord Scarman said: “I question whether there is any need in the modern law to erect a principle of relief against inequality of bargaining power”.

Unconscionable contract has been existed for centuries as a ground for intervention by equity in a variety of circumstances, usually focusing on the notion of equitable fraud. A person may unconscionably seek to depart from a promise, representation or assurance made. A contract may be entered into because one party has engaged in unconscionable conduct in order to influence the other to enter into the contract. Without such a contract, one can use it power and dominate others. Therefore, it is reasonable to say that unconscionable contract is an enhancement in many aspects of legal position.

Examples may include the likely case that when a person, because of some special disability, deals with another party on unequal terms and is induced by the other party, who is or ought to be aware of the disability, to enter into an unfair transaction. The law will be on the stronger party to establish the contract is fair, just and reasonable. There are many cases linked with unconscionable contract where the participants of the contract had violated the law trying to damage, destruction of other goods and definitely make an unjust profit: Sear v Cohen (1881) 45 LT 589 states: A father was threatened that criminal actions will be taken against his son if he did not sign promissory notes for a sum of money alleged to have been misappropriated by the son. This is kind of unjust contract forcing a person to do what he does not want to. The concept of unconscionability as a basis for relief may be established by evidence, inequality of bargaining power in particular cases.

Where a contract is found to be unconscionable, the normal remedy is an order for rescission. The application of unconscionable contract allows avoiding injustice to the party against whom the order is made, but the limits of this power have not been explored and a feature of the statutory provisions is greater flexibility to meet the needs of the particular case.

In our world today when frauds, detention possesses in order to make unjust contracts whether the contract contains unreasonably able difficult conditions or criminal proceedings. Finally with appearing of unconscionable conduct there is a huge improvement in business law with amendments applying to each case. Government legislation hopes this type of law will affect an ethical issue of contractual policy as a whole and parties are not going to neglect a legislation of Australia.

They say unconscionable contract is the growth area in this part of the law. Consumers and small business persons now enjoy specific statutory protection from such conduct and a wide range of orders may be made in respect of equitable unconscionable contract under the Trade Practices Act 1974. In addition, the equitable remedy of rescission now extends to situations where partial or conditional rescission is possible.

The concept of unconscionability as a basis for relief may be established by evidence of inequality of bargaining power in particular cases but unconscionability does not lend itself to specification. It is an error to circumscribe equity’s jurisdiction by supposing that equitable fraud can be specifically defined, or that classes of case in which it has been found to exist are mutually exclusive, or by concluding that an element such as inadequacy of consideration or disadvantage resulting from a transaction which influenced a court to relieve in a particular case, is always essential, or that any one element, such as the presence of independent advice, which supported a refusal of relief in a particular case, will always be decisive.

The prescription of certain elements, proof of which by the plaintiff is to place an “onus of justification” on the transaction of the defendant cannot make predictable decisions which depend on all the circumstances of the particular case and which necessarily involve an element of impression. It therefore seems more profitable, outside the statutory contexts in which unconscionability is made a specific ground for relief, to approach unconscionability as a component of the general jurisdiction of the courts to grant relief in cases of equitable fraud, and to see unconscionable conduct as a circumstance which may attract the exercise of that jurisdiction.


u David E. Allan, Mary E. Hiscock, 1992, Law of contract in Australia, New South Wales, Australia

u Seddon, N., 1997, Law of contract, 4th edition, Sydney, Butterworths

u Treitel, G. H., 1995, Law of contract, 9th edition, Sweet & Maxwell, London

u Andrew, T., Des, G., Business, society & The law, Sydney, Harcourt Brace

u Belconnen, Unconscionable conduct: a guide to section 52A of the Trade practices Act, A.C.T.: Trade Practices Commission, 1987

u Allan, D.E., Law of Contract in Australia, North Ryde, N.S.W.: CCH Australia, c1987

u Seddon, Nicholas, Law of Contract 4th Australian Ed, Sydney, Butterworths, 1997

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