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What is an Unconscionable Contract?

Question:

Discuss about the Unconscionability in European Private Financial.

A contract is the promise which two or more parties make to each other, for fulfilling the obligations covered under the contract. However, there are times where the contract which has been formed, becomes void, unenforceable or voidable, owing to certain situations being present. One of such instances, where these results can be attained, is unconscionable contract. Unconscionable contract or unconscionability under the English law denotes the dominating party under the contract, exploiting the weaker party, based on their special disability[1]. This is the reason why inequality of bargaining power is also used as a term to refer to unconscionable contracts. The unconscionable contracts can further be classified in undue influence and duress. Where such happens, that consent to the contract is undertaken based on undue influence or duress, the court stops the enforcement of such contracts. Where any money or goods are transferred as a result of such conduct, the same can be claimed back[2].

The law places limitations on the exercising of the economic power by the contracting parties. Traditionally, this has been covered under the doctrine of undue influence and duress, but in the recent years, attempts have been made to introduce it in the common law as a doctrine of bargaining power. This discussion attempts to analyse that duress and undue influence act as appropriate law against the unconscionable contracts. At the same time, a possibility of bringing in a stronger law, based on jurisdiction like Australia would also be highlighted. In carrying on this analysis, reference would be made to the established cases. This would help in getting clarity on how the issues of undue influence and duress are dealt under the English law, particularly to protect the weaker party, having the special disability.

A leading case in this area is that of Lloyds Bank v Bundy[3]. In this case Bundy was the owner of a house and this house was the extent of his estate. A business was being operated by his son and this business was not going well and he was asked by his son to give collateral for taking loan from Lloyds. The original collateral was signed by the father for a small sum, after he had considered it overnight and had talked to his layers. After some time, the son required more collateral and this could only be provided when Bundy could give the house as collateral. When the bank lawyers came with his son, they told Bundy that he was only signing the document for helping his son, which led to Bundy signing the document. After five months, the bank foreclosed the assets of the son. Further, as the son became bankrupt, the house of Bundy was seized. Bundy, however, refused to leave the house and he was eventually sued by the bank for getting him evicted. The issue in this case was related to presence of unconscionability, and where unconscionability was present, whether the contract could be deemed as void[4].

Undue Influence and Duress in Unconscionable Contracts

The court stated that where a customer signed a bank charge, they could not get out of it. However, they highlighted a key exception of this rule and stated that such thing was not be upheld, where the parties had not met on equal terms, particularly where the dominating party had stronger bargaining power in comparison to the weaker matter, which made the entire matter unfair towards the weaker party, due to the weaker party being pushed to the wall by the stronger party. Denning J highlighted five different categories of unconscionability, where they highlighted duress of goods, unconscionable contracts, undue influence, undue pressure and salvage agreements. He stated that all these categories had an inequality in the bargaining powers. In such cases where any party which enters into a contract without getting any independence advice, where the terms of the contract are unfair or where the property is transferred for a consideration which is majorly inappropriate, would have seriously impaired bargaining power and thus, would be relieved by the law[5].

In the present instance, Denning J found that the consideration from bank had been grossly inadequate, which benefitted the bank in a great manner. However, nothing in return was given to Bundy since the business of his son was failing anyway. A trust had been placed by Bundy at the bank and this trust was taken advantage of by the bank. The relationship of Bundy and his son, and the wish of Bundy to see his successful was a key influencer on him, which resulted in his bargaining power being negated. In view of Denning J, this case fell under the older title of unconscionable transaction as the bank exploited an apparent weakness which Bundy had. It was required for the bank to refrain from sweeping the only asset which Bundy had and should have advised him on getting an independent legal advice before signing the documents[6].

The ratio of this case became the guideline for getting a contract voided owing to the presence of unconscionability. So, for holding a contract as voidable, it was required that the terms of the contract had been unfair or that the consideration of the contract had been inadequate. This was followed by the bargaining power of the weaker party having being impaired by infirmity, necessity or ignorance. There is a need for showing the undue influence or pressure had been used, which could have been done consciously or unconsciously. Lastly, there was a need of showing that there was a lack of independent advice[7].

A key thing which also needs to be clarified here is that relationship which is present between the bank and its customer is not one of confidence and trust; rather it is a business relationship and the banks are right in looking out for their interest, based on Natwest Bank v Morgan[8]. Though, this case showed that the bank manager had given the evidence of admitting that the father had relied on his advice only, which made the bank liable. So, it is crucial that clarity is attained on the nuances of the case, before the weaker party can actually get relief by claiming the presence of unconscionable contract.

Lloyds Bank v Bundy

Duress refers to such a situation, where the individual enters in an agreement due to certain threat. Where the parties enter any contract owing to duress, such a contract can be set aside. The common law earlier used to recognize the threats of unlawful physical violence only, but with change in time, economic duress also has been given proper validity. Though, in cases of goods, the courts are not very willing in intervening. Though, through the analogous claim in restitution, this position is set to change[9].

There are three types of duress, which can result in the contract being deemed as voidable. The first category is of duress to person. This could include the act of actual violence to claimant or to the members of family, or the threat of such instance of violence taking place. In the case of Barton v Armstrong[10], it was held by the Privy Council that the threats have to be the only reason for getting in a contract for holding the presence of duress. In this regard, it is enough to show that the threats had been a factor of influencing the victim in getting in the contract[11].

The second category of duress is the duress to goods. This refers to the threat of damage being caused to the goods of the victims, instead of the damage being caused to the person. In the case of Skeate v Beale[12], a landlord had been owed some money by their tenant. As a result of this, he seized the goods of tenant and threatened that he would sell them off, unless the tenant was ready to enter in an agreement for repaying the outstanding amount. It was agreed by the tenant that he would repay the money based on the terms but attempted to set aside the agreement owing to duress. The court held that the duress of good was not sufficient in this case to render the contract as voidable. The unlawful detention of goods of another person was thus not deemed as duress[13].

However, the ruling given in Skeate v Beale is not followed presently, due to the development of doctrine of economic duress through the case of Occidental Worldwide Investment Corporation v Skibs (The Sibeon & The Sibotre)[14]. Lord Goff, in the case of Dimskal Shipping v International Transport Workers Federation (The Evia Luck)[15], provided that the limitation of the case of Skeate v Beale was that only the duress to individual would allow the party to avoid any contract which had been discarded. This brings the discussion to the third type of duress, which is also the most difficult one to stabilize. This type is of economic duress. An economic duress is raised when one of the parties in the contract, makes use of their superior economic powers illegitimately, which results in the other contracting parties being coerced to give acceptance to certain set of terms. Through the case of R v Attorney General for England and Wales[16], the existence of economic dues was affirmed. This case required the nature of pressure and demand to be analysed to examine the legitimacy of pressure.

Criteria for a Contract to be Voided Due to Unconscionability

Undue influence is the equitable doctrine, which is different from the common law duress. Even though this is a phrase used in common parlance, the exact meaning of this term remains unclear. Two key principals have to be viewed in this regard. The first one is that the undue influence cases are focused on position of the claimant and that the court gives relief based on impairment of the decision making process of the claimant, which was caused due to the high reliance or the dependence of the claimant on the defendant. The other view requires the wrongful conduct to be shown on the part of defendant[17].

The focus is thus on the requirement of abuse of position, which was one of confidence, whereby the weaker party was exploited or was taking advantage of. Lord Hoffmann provided in the case of R v Attorney General for England and Wales that both duress and undue influence are based on principle that any transaction where the permission has been attained through the use of unacceptable means, cannot be permitted to stand. Undue influence is basically the unfair exploitation by one party of relationship, which gives them the influence on the other party. A strong focus is given to the analysis of undue influence through combining the analogy of duress and requirement of showing unfair exploitation or unacceptable means[18].

Lord Millett adopted a similar approach in the case of National Commercial Bank (Jamaica) Ltd v Hew & Ors (Jamaica)[19]. Undue influence in this case was defined as one of the grounds where equity intervened for giving redress, in such cases, where there had been certain unconscionable conduct on the defendant’s party. This doctrine had two elements; the first one was that a relationship has to be shown, which could give rise to necessary influence; and the second one where the influence was created by relation which had been abused.

There is also a classification of undue duress, as being presumed and actual. The cases involving the actual undue influence overlap with duress. In the case of Royal Bank of Scotland v Etridge[20], Lord Nicholls made an observation that the actual undue influence covered the overt acts of coercion or improper pressure like the unlawful threats. This is the reason why there is an overlapping with the present day principles of duress and undue influence.

The problem is increased when the cases of presumed undue influence is faced. The House of Lords in Royal Bank of Scotland v Etridge introduced a note of caution particularly for this area of law. This has led to a discouragement in reliance being placed on the presumed undue influence. Under the presumed undue influence, there are three key elements. The first one is for the claimant to show that confidence and trust was placed by the claimant. The next requirement is for the claimant to show that the transaction called for an explanation. The last requirement is to show the attempt of the defendant to rebut the undue influence inference which was raised from proof by claimant regarding the presence of relationship of confidence and trust, and that of a transaction requiring explanation.

Relationship between Banks and Customers

For instance, in National Westminster Bank v Morgan[21], the court held that there was no normal relation between the banker and customer, which could be deemed as a relation of confidence and trust. This was due to the fact that the transaction which took place in this case, did not require an explanation to be given. The court, after meticulously examining the facts of the case, stated that the bank never cross the line, which could make the transaction unfair. This meant that the bank did not have the duty of making certain that the wife got the independent advice.

To shed light on the third element of presumed undue influence, reference needs to be made to Re Brocklehurst (deceased)[22]. The court in this case, after analysing the facts of it, stated that the nature of relation between the defendant and the deceased was not such which could be deemed as one of trust and confidence; ad so it could not give rise to presumed undue influence on defendant’s party. The relationship here was of friendship which did not require defendant to be imposed with a duty of advising the deceased or that he held a dominant position over the deceased. The situation in reality was reverse, as the defendant dominated the deceased. Even when the relation is assumed to give rise to presumed undue influence, it would be rebutted as the deceased had undertaken independent advice regarding the leases.

The previous segments highlighted that the present day common law covered under the English law’s contract law, provided the weaker party with the protection from the unconscionable contracts. The common law is strong enough to give protection to the weaker parties and can easily stop the dominant parties from taking advantage of the weak position of the other party. However, as discussed earlier, there is a lot of difficulty in actually making use of these provisions, so much so that the individuals refrain from placing reliance on such laws. This requires certain changes to be brought into the present day contract law, whereby a proper structure is given to the individuals, so that they can take advantage of this law in a clear and unambiguous manner. Here, inference needs to be taken from the laws of Australia, where they have adopted the provisions of unconscionable conduct under the Australian Consumer Law[23]. This legislation brings out its own provisions, by merging the provisions under the common law.

Where the laws of UK are analysed, one can find such legislations, which do protect the weaker parties. For instance, the Unfair Terms in Consumer Contracts Regulations, 1999[24] protect the consumers from unfair terms in the contracts. The regulations have been created under the EC Directive on Unfair Terms in Consumer Contracts (93/13 EEC)[25]. This regulation requires the terms of the contract to be written in clear manner and in unambiguous language. However, there is another legislation which presides on this area of unfair contractual terms, and this is Unfair Contract Terms Act, 1977[26]. Owing to the presence of two legislations on same topic, certain difficulties are born.

Duress in Contracts

Even though there have been plans on bringing out the doctrine of unconscionability, problems have been raised on its creation. There are different reasons for it. The first is that it could become difficult for the court to identify the contracts which were unfair, owing to the adversarial nature of case laws. Further, a general doctrine would result in uncertainty, which cannot be accepted. There is also the problem of general aversion of English law to create a board. Lastly, the contract law does not have the function of engaging in wealth redistribution. So, the formation of a doctrine of unconscionability would result in creation of unacceptable levels of uncertainty, even when it would prevent injustice in certain cases.

Conclusion  

Thus, from the discussion carried on in the previous segments, it can be concluded that the present day law protecting the parties from unconscionable contracts, owing to the presence of duress and undue influence are good enough laws and also serve their purpose. At times, there are cases where a lot of confusion occurs on which element has to be applied, or whether a particular element can be applied. In such cases, the established cases, and the verdicts given under them, act as guidance. This helps in protecting the weaker party and stops the dominating party from taking advantage of the weakness of such party. With the cases like Lloyds Bank v Bundy, the concept of unconscionable contracts and how they can be established by the court. With newer cases, the changes were brought to the common law, where the earlier cases were set aside to keep up with the changes of the changed time. However, there is still a lot of scope for improvement, and in this regard, there is a need to learn from the other jurisdictions to safeguard the weaker parties. Also, there is a need to analyse the possible issues which can be raised from undertaking such a new common legislation, as the discussion carried about highlighted the possible problem which could be raised from passing a doctrine on unconscionability.

Barton v Armstrong [1976] AC 104

Dimskal Shipping v International Transport Workers Federation (The Evia Luck) [1991]4 All ER 871

Lloyds Bank v Bundy [1975] QB 326

National Commercial Bank (Jamaica) Ltd v Hew & Ors (Jamaica) [2003] UKPC 51

National Westminster Bank v Morgan [1985] 1 AC 686

Natwest Bank v Morgan [1985] AC 686

Occidental Worldwide Investment Corporation v Skibs (The Sibeon & The Sibotre) [1976] 1 Lloyds Rep 293

R v Attorney General for England and Wales [2003] UKPC 22

Re Brocklehurst (deceased) [1978] Ch 14

Royal Bank of Scotland v Etridge [2001] 3 WLR 1021

Skeate v Beale [1840] 11 Ad & El 983

Competition and Consumer Act, 2010

EC Directive on Unfair Terms in Consumer Contracts (93/13 EEC)

Unfair Contract Terms Act, 1977

Unfair Terms in Consumer Contracts Regulations, 1999

Andrews N, Contract Law (Cambridge University Press 2011)

Chen-Wishart M, Contract Law (2nd edn, Oxford University Press 2007)

DiMatteo LA and Hogg M, Comparative Contract Law: British and American Perspectives (Oxford University Press 2016)

Enonchong N, Duress, Undue Influence and Unconscionable Dealing (Sweet & Maxwell 2012)

Kenny M, Devenney J and O'Mahony LF, Unconscionability in European Private Financial Transactions: Protecting the Vulnerable (Cambridge University Press 2010)

McKendrick E, Contract Law (12th edn, Macmillan International Higher Education 2017)

Stone R and Devenney J, Text, Cases and Materials on Contract Law (4th edn, Routledge 2017)

Tamblyn N, The Law of Duress and Necessity: Crime, Tort, Contract (Routledge 2017)

E-Law Resources, ‘Lloyds Bank v Bundy [1975] QB 326’ (2018) <https://www.e-lawresources.co.uk/Lloyds-Bank-v-Bundy.php> accessed 08 March 201

[1] Larry A. DiMatteo and ‎Martin Hogg, Comparative Contract Law: British and American Perspectives (Oxford University Press 2016)

[2] Mel Kenny, ‎James Devenney and ‎Lorna Fox O'Mahony, Unconscionability in European Private Financial Transactions: Protecting the Vulnerable (Cambridge University Press 2010)

[3] [1975] QB 326

[4] Neil Andrews, Contract Law (Cambridge University Press 2011)

[5] E-Law Resources, ‘Lloyds Bank v Bundy [1975] QB 326’ (2018) <https://www.e-lawresources.co.uk/Lloyds-Bank-v-Bundy.php> accessed 08 March 2018

[6] At 4

[7] Ibid

[8] [1985] AC 686

[9] Nathan Tamblyn, The Law of Duress and Necessity: Crime, Tort, Contract (Routledge 2017)

[10] [1976] AC 104

[11] Richard Stone and James Devenney, Text, Cases and Materials on Contract Law (4th edn, Routledge 2017)

[12] [1840] 11 Ad & El 983

[13] Ewan McKendrick, Contract Law (12th edn, Macmillan International Higher Education 2017)

[14] [1976] 1 Lloyds Rep 293

[15] [1991]4 All ER 871

[16] [2003] UKPC 22

[17] Nelson Enonchong, Duress, Undue Influence and Unconscionable Dealing (Sweet & Maxwell 2012)

[18] Mindy Chen-Wishart, Contract Law (2nd edn, Oxford University Press 2007)

[19] [2003] UKPC 51

[20] [2001] 3 WLR 1021

[21] [1985] 1 AC 686

[22] [1978] Ch 14

[23] Competition and Consumer Act 2010, sch 2

[24] Unfair Terms in Consumer Contracts Regulations, 1999

[25] EC Directive on Unfair Terms in Consumer Contracts (93/13 EEC)

[26] Unfair Contract Terms Act, 1977

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