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Unconscionability (sometimes known as unconscionable dealing/conduct in Australia) is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining power, that they are contrary to good conscience. Typically, an unconscionable contract is held to be unenforceable because no reasonable or informed person would otherwise agree to it. The perpetrator of the conduct is not allowed to benefit, because the consideration offered is lacking, or is so obviously inadequate, that to enforce the contract would be unfair to the party seeking to escape the contract.
Unconscionability is determined by examining the circumstances of the parties when the contract was made, such as their bargaining power, age, and mental capacity. Other issues might include lack of choice, superior knowledge, and other obligations or circumstances surrounding the bargaining process. Unconscionable conduct is also found in acts of fraud and deceit, where the deliberate misrepresentation of fact deprives someone of a valuable possession. When a party takes unconscionable advantage of another, the action may be treated as criminal fraud or the civil action of deceit.
For the defense of unconscionability to apply, the contract has to have been unconscionable at the time it was made; later circumstances that make the contract extremely one-sided are irrelevant. There are generally no standardized criteria for determining unconscionability; it is a subjective judgment by the judge, not a jury, and is applied only when it would be an affront to the integrity of the judicial system to enforce such a contract. Upon finding unconscionability a court has a great deal of flexibility on how it remedies the situation. It may refuse to enforce the contract against the party unfairly treated on the theory that they were misled, lacked information, or signed under duress or misunderstanding; it may refuse to enforce the offending clause, or take other measures it deems necessary to have a fair outcome. Damages are usually not awarded.
Procedural unconscionability is seen as the disadvantage suffered by a weaker party in negotiations, whereas substantive unconscionability refers to the unfairness of terms or outcomes. Most often the former will lead to the latter, but not always. The existence of the procedural unconscionability without substantive unconscionability may be sufficient to set aside a contract, but the latter, by itself, may not. As with issues of consideration, the court's role is not to determine whether someone has made a good or bad bargain, but merely whether that party had the opportunity to properly judge what was best in their own interests.
There are several typical examples in which unconscionability are most frequently found:
The leading case for unconscionability in the United States is Williams v. Walker-Thomas Furniture Co., in which the defendant, a retail furniture store, sold multiple items to a customer from 1957 to 1962. The extended credit contract was written so that none of the furniture was considered to be purchased until all of it was paid for. When the plaintiff defaulted and failed to make payments on the last item of furniture, the furniture store attempted to repossess all of the furniture sold since 1957, not just the last item. The District of Columbia Court of Appeals returned the case to the lower court for trial to determine further facts, but held that the contract could be considered unconscionable and negated if it was procured due to a gross inequality of bargaining power.
In the United States, the concept as applied to sales of goods is codified in Section 2-302 of the Uniform Commercial Code.
Under the Second Restatement of Contracts, a party may assert a claim for relief from unilateral mistake regarding the terms or conditions of a contract or a liquidated damages clause. Relief for unilateral mistake may be granted if the mistake would render enforcement of the contract unconscionable. The Restatement considers factors such as: 1) absence of reliance by the promisee; and 2) gross disparity in values exchanged.
Despite the indication of these considerations, however, most challenges to liquidated damages clauses survive legal challenges based on unconscionability.
The Restatement also has a separate provision on unconscionability at §208, "Unconscionable Contract or Term," which broadly allows a court to limit the application of an unconscionable term or contract in order to avoid an unconscionable result.
Main article: Unconscionability in English law
"Inequality of bargaining power" is a term used in English law to express essentially the same idea as unconscionability, which can in turn be further broken down into cases on duress, undue influence and exploitation of weakness. In these cases, where someone's consent to a bargain was only procured through duress, out of undue influence or under severe external pressure that another person exploited, courts have felt it was unconscionable to enforce agreements. Controversy exists as to whether a contract should be voidable simply because one party was pressured by circumstances wholly outside the other party's control.
The leading case on undue influence is considered to be Lloyds Bank Ltd v Bundy; the case is remarkable in that judgment was put forth that English law should adopt the American approach that all impairments of autonomy should fall under the single principle of "inequality of bargaining power". In this case, Bundy agreed to increase the mortgage on his farmhouse in order to maintain the line of credit being extended to his son's business. The question was whether the contract leading to the repossession of Bundy's farmhouse was voidable due to pressure brought by the bank. The Court of Appeal of England and Wales ruled that since the amount of the loan was already higher than the existing mortgage, Bundy received no direct benefit from the agreement to increase the mortgage amount; that the bank failed to notify him of the true financial condition of his son's business, and that it threatened to call in his son's loan if Bundy did not agree to the increase. Furthermore, since Bundy relied upon Lloyd's for the mortgage and his son's line of credit, the bank-customer relationship was found to have created a fiduciary duty; hence, the bank should have recommended that he seek independent legal advice. Lord Denning MR found that the contract was voidable owing to the unequal bargaining position in which Bundy had found himself, in that he had entered into the contract without independent advice and that unfair pressures were exerted by the bank. Essentially, the court ruled that only the bank benefitted from the agreement to raise the amount of the mortgage, and that it had exploited Bundy's weakness. The transaction was found to be unconscionable and Bundy only had to honor the lower mortgage amount.
It is notable that Denning's judgment did not represent the law in National Westminster Bank plc v Morgan, in which a family home was likewise subjected to a second mortgage to secure a loan on the husband's business with Abbey National Bank. The Morgans got into arrears on the loan, and National Westminster Bank, commonly known as "NatWest", offered a rescue package to help the couple save their home, where they would pay off the existing mortgages and give the couple a bridge loan for the purposes of aiding the husband's business. In the limited time the NatWest manager spent alone with Mrs. Morgan, she stated that she did not want to be exposed to any extra risks, as she had no faith in her husband's business ability. The bank manager assured her that the risks were limited and did not advise her to get independent legal advice. She signed the contract, and the bank later called in the loan when the Morgans defaulted. Mrs. Morgan's defense was that the bank manager had exercised undue influence over her in procuring her signature. Unlike Lloyds Bank Ltd v Bundy, it was found that there was no undue influence since the transaction was not a "manifest disadvantage" to the couple, and that Mrs. Morgan had not established a relationship of trust and confidence in the brief time she spent with the NatWest manager.
Unconscionability is also an important element of the English law of trusts. A constructive trust arises, by operation of law, when the conscience of a legal owner is affected meaning they cannot deny the equitable interest of the beneficiary for whom they consequently hold the property as trustee. Additionally, unconscionability is a necessary element to the finding of proprietary estoppel.
The doctrine of unconscionability is well-established in Canada, where it has branched from the older and more settled doctrine of undue influence, and is generally defined as taking undue advantage of an inequality in bargaining power.
In the 1978 case of Harry v. Kreutziger, Harry was a First Nations Aboriginal with a congenital partial hearing defect. A commercial fisherman, he had a grade 5 education and was not widely experienced in business matters. He owned a boat worth only $1,000, but it came with a fishing license: since the British Columbian government had ceased issuing new licenses, one could only be obtained through transferral. Due to this limitation and recent excellent salmon harvests, licenses were worth around $15,000, meaning that the total value of Harry's boat was $16,000. Kreutziger first offered Harry a check for $2,000, which he returned through his brother. Kreutziger gave him back the cheque several times, assuring Harry that as an Aboriginal he would easily be able to get another license. Harry finally agreed to sell for $4,500, but then Kreutziger unilaterally reduced the price by $570, deducting the cost of conversion of the boat license from an "AI" license (available only to Aboriginal peoples) into an "A" license. Harry then applied for another license, but was rejected on the grounds that he had left the fishing industry when he sold the boat. Harry sued to have the sale set aside, but was unsuccessful at trial.
The British Columbia Court of Appeals found there was a clear inequality between the parties due to Harry's lack of education and physical handicap, as well as the difference in class, culture, and economic circumstances between the two parties. Kreutziger's actions clearly demonstrated his power; he was very aggressive in the negotiations and was able to unilaterally modify the price for his own benefit. Kreutziger was also unable to demonstrate that the deal was in any way fair, as the price was one-quarter of the true value of the boat and license. The court rescinded the contract because of the unconscionability of the underlying transaction, ruling that the buyer was trying to take advantage of the seller's lack of knowledge of the value of the license, and ordering Kreutziger to return the boat and license to Harry, and Harry to return the payment of $3,930 to Kreutziger.
However, severe undervaluation of property and sorely inadequate consideration in and of itself is not a determination of whether a transaction is unconscionable. For example, in an Ontario case, a property owner agreed to sell an option for the sale of his property for the sum of $1.00. The owner later learned that options to purchase property usually sell for more than nominal sums. The court enforced the contract in favour of the option holder, ruling that the negotiations over the price of the option and the price the option holder would pay for the house if he chose to buy were both fairly negotiated and that the seller had adequate opportunity to investigate the market and simply did not do so.
The leading Australian case is Commercial Bank of Australia Ltd v Amadio, in which an elderly Italian migrant couple guaranteed their builder son’s business debts to the Commercial Bank. At the time the mortgage was executed, the bank manager was aware of the son's precarious financial position and knew that the Amadios, who did not speak English well, were not so informed, but did nothing to further explain the situation to them or suggest they get independent advice. In addition, the bank did not advise the Amadios that there was no limit on their liability under the guarantee; the Amadios believed their liability was limited to $50,000.
When the son's business failed, the Amadios had the contract set aside due to unconscionable dealing by the bank. The court held that the bank manager knew about the “special disability” of Amadios, referring to their advanced age, lack of business acumen, lack of fluency in written English, and their reliance on their son's [inadequate] disclosure of his finances.: 466 A special disability is one which seriously affects the ability of the person subject to it to make sensible decisions of their own best interest. This "disability" was sufficiently evident to the bank, as the stronger party, to make their acceptance of the weaker party's assent to the transaction manifestly unfair. The bank did not ensure that the Amadios fully understood the nature of the transaction; therefore the bank’s taking advantage of the opportunity that presented itself was unconscionable.
While Amadio is the leading authority on unconscionable dealing in Australia, courts have frequently relied upon other cases to help define what constitutes special disability. Courts have extended the scope of what is special disability to include infatuation causing vulnerability and mental disorder. In Louth v Diprose, the Respondent, a solicitor, was infatuated with Louth. He provided her with a multitude of gratuitous gifts and a marriage proposal, which Louth declined. Louth suffered from depression and threatened to commit suicide if she were to become evicted. In response, the Respondent bought her a house and put it in Louth’s name. Following a deterioration of the relationship, the Respondent requested Louth to transfer the property in his name, which Louth refused. The Respondent initiated legal proceedings to recover the property, alleging he had suffered a special disability entitling rescission of the contract. Deane J, in the majority, held that Diprose’s infatuation placed him in a position of emotional dependence which placed Louth in a position of ascendancy and influence. Louth was found to be aware of the special disability she had deliberately created and exploited it for her benefit, even though Louth articulated her lack of romantic interest in Diprose on numerous occasions.
Intoxication is generally not regarded as a special disability, although in Blomley v Ryan it was found that the severity of Ryan's drunkenness, in combination with Blomley's knowledge of his alcoholism, was enough to warrant special disability. In Blomley v Ryan, the Plaintiff purchased a property from the Defendant at a very low price. During the transaction, the Defendant was of old age and heavily intoxicated which was conspicuous to the Plaintiff. After the transaction, the Defendant refused to perform the transfer of property and so the Plaintiff sought specific performance while the Defendant sought to set aside the contract. The Court ruled that ‘mere drunkenness’ is not a defence to resist a contract. However, it stated that where there is knowledge of one party that the other party is seriously inebriated and that party takes advantage of such inebriation, equity will intervene to refuse specific performance.
Courts have also frequently relied upon the observation of the majority of the High Court in Krakowski v Eurolynx Properties Ltd when considering the amount of knowledge that can be imputed to a company.
Based on this case, the new concept of "unconscionability" in general and contractual law was passed by Australian legislation, defining it in two ways:
Amadio and other cases have seen a greater willingness by courts to set aside contracts on the grounds of unconscionability. This has been partly influenced by recent statutory developments.
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