Elements of Unconscionability

As mentioned in the first chapter, this paper primarily aims to statutory incorporated doctrine of unconscionability into the Contracts Act 1950. In order to do so, the doctrine of unconscionability has to be sufficiently defined and the elements have to be determined. Hence, this chapter will discuss about the elements of unconscionability.

Since doctrine of unconscionability was used as a ground to set aside a transaction by the court of equity back in the second half of the seventeenth century, no common law cases had expressly discussed the extent which unconscionability applies and the necessary elements required to established unconscionability, leaving this doctrine to be vague and uncertain in its scope. Therefore, this paper will examine the cases of common law jurisdiction to determine the essential elements of unconscionability.

Generally, cases of unconscionability contain five common elements.

3.1 Complainant’s special disability

Whether the complainant must suffer from a special disability is one of the element is not an issue to be discussed because it is already crystal clear from all unconscionable cases, where the courts expressly require the finding of the complainant’s special disability to establish unconscionability. The question is: what amounts to special disability?

In the case of Blomley v Ryan, Justice Fullagar defined special disability broadly as “…poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary.” Justice Kitto in the same case added that, “…illness, ignorance, inexperience, impaired faculties, financial need or other circumstances which affect his ability to conserve his own interests” also amounts to special disability.

However, it is to be noted that special disabilities listed in this case are not exhaustive and comprehensive. From cases, there are many other forms of special disability which are recognized by the court. The special abilities in cases can be divided into 3 main categories, which are mental infirmity, ignorance of the contract terms and lacking of information or experience.

3.1.1 Mental impairment

Mental impairment refers to the defective mental equipment of the complainant that affects the complainant’s capacity to understand and assess the terms of the transaction in a negative way. Mental impairment can be divided into 2 categories, which are long-term mental impairment and temporal mental impairment. Long-term mental impairment

Long-term mental impairment refers to impairment which the complainant is unlikely able to recover from in the foreseeable future. From cases, long-term mental impairment does not only limited to severe mental infirmity and severe mental impairment but includes less severe type of mental impairment. The cases below will start off with the severe long-term mental impairment.

In Marshall v Canada Permanent Trust Co, the complainant suffered brain damage due to the hardening of arteries, which affected his ability to think and speak and thus, the court held it to be a severe mental infirmity which made him incapable of transacting business. Likewise, in Tweedie v Geib, complainant’s retardation was an example of a severe mental infirmity.

The case of Errington v Martell-Wilson (deceased) and Cook also shows an example of severe long-term mental infirmity. In this case, the complainant was frequently having a grossly confused mental state and suffering from delusions. She contended that she has seen and spoken to her dead sister. Besides that, she had a bad memory and never seeming to be able to find things she wants and after a short time forgetting what she was searching for.

Another example of severe long-term mental impairment can be seen in Paris v Machnick, whereby the complainant who attended only the first grade in school and could neither read nor write, had no capacity to understand figures. Court held this to be a mental impairment as the complaint would not even know the difference between $500 and 5,000.

Less severe type of long-term mental impairment can be shown in the following cases. In the case of Nichols v Jessup, the court is willing to accept “unintelligent and muddleheaded” as kind of special disability. Likewise can be shown in the case of Clark v Malpas and Harris v Richardson where “imperfectly educated and intellectually not gifted” and “possessing an intelligence which is not of a high order” were also accepted by the court as fulfilling the element of special disability.

Apart from that, the courts have been lenient enough to accept gullibility as a type of special disability. This can be shown in the case of Portal Forest Industries v Saunders whereby the court held that the complaint’s “very naïve, frank and quite artless” characteristic constitutes his special disability. Likewise is shown in Gaertner v Fiesta Dance Studios whereby the complainant showing “incredible gullibility” was held to be suffering from special disability. Temporal mental impairment

Temporal mental impairment refers to mental impairment which is temporal in nature. Examples can be seen in the following cases.

In Bank of Montreal v Hancock, nervous breakdown lasting for several months prior to the impugned transaction due to the complainant’s family circumstances which is the death of her father, alcoholism of her husband and delinquency and truancy of her children is example for temporal mental impairment which fulfills the element of special disability.

Another example of temporal mental impairment can be seen in Natuk v Kawulu, whereby the complainant contracted with her son after a series of incidents which caused her to “work herself up to an emotional pitch which precluded rational thinking or decision-making and which ultimately caused her to believe that she… was in need of medical treatment” . Similarly, in Growden v Bean, severe depression was held to have fulfilled the element of special disability.

3.1.2 Ignorance or misunderstanding of the contract

Ignorance or misunderstanding of the contract terms is often held by the court as a kind of special disability. In practice, the ignorance or misunderstanding of the contract is mostly due to the illiteracy of the complainant.

In the case of CBA v Amadio, the complainants (elderly Italians) who were ignorant in English were induced by their son to sign the guarantee agreement in English where they were told that it was limited to $ 50,000 and for only six months but it was in fact, unlimited to amount and time. Illiteracy in English was held to have satisfied the element of special disability in this case.

Likewise, in Taylor v Armstrong, the complainant was an illiterate, who was induced by a woman with whom he lived with to convey to her a part interest in his house in the belief that he was signing a will. His illiteracy was held to amount to the special disability in that case.

3.1.3 Lack of information and experience

Complainant’s lack of information and experience is also often noted by the court as a type special disability.

The case of CBA v Amadio is an example of complainant’s lack of information which affects their assessment of the transaction. In this case, the complainants were told that the guarantee was limited to $ 50,000 and for only six months but it was in fact, unlimited to amount and time.

Besides that, complainant’s lack of relevant experience is also recognized by the court as a kind of special disability.

In Hnatuk v Chretian, the complainant was referred to as intensely ignorant of all legal procedure was held to have fulfilled the requirement of special disability as the transaction required a degree of knowledge regarding the legal procedure for the complainant to protect his own interest. Similarly, in Elia v Commercia & Mortgage Nominees Ltd, the complainant was lacking of business experience and only has limited intelligence, making him unable to make any worthwhile assessment of the transaction, which in the eyes of the court, fulfill the element of special disability.

3.1.4 Conclusion for special disability

The three types of special disability discussed above are consistently noted by the courts in finding special disability. Ultimately, all the 3 categories of special disability share a common characteristic, which is that they are all cognitive weaknesses. As the phrase suggests, the 3 types of special disability discussed above are all of the impairment in the complainant’s ability to understand and access the terms of the contract for the complainant’s own interest.

Therefore, from the discussion above, we can sum up that to satisfy the element of special disability, the complainant will have to prove on the balance of probability that his disability when contracting was of a cognitive disability and the 3 types of disabilities above are the 3 main categories of cognitive disability.

3.2 Enforcer’s knowledge of complainant’s disability

3.2.1 Is this element necessary?

Whether enforcer’s knowledge of the complainant’s disability is one of the essential elements to establish unconscionability is what we have to find out by looking at the group of cases. To deal with this component, cases can be divided in to 3 groups.

First group consists of cases which the courts expressly recognize the need of the enforcer to have knowledge regarding the complainant’s disability to establish unconscionability in principle.

In Commercial Bank of Australia Ltd v Amadio, court held that to establish unconscionability, the enforcer needs to have actual knowledge of the complainant’s special disability. In Black v Wilcox, the court specifically enquired on whether the enforcer knowingly took advantage of the complainant’s special disability to find unconscionability. In New Zealand, in the case of Moffat v Moffat, where the court held that a transaction was unconscionable if the complainant was “under a disability or disadvantage sufficiently serious to make it unfair to allow it to stand in favour of one who knew or ought to have known of that condition”.

In the second group of cases, the courts though did not refer formally to the requirement of the knowledge component in principle, the courts have, nevertheless, expressly noted its presence in finding unconscionability; alternatively, they have noted its absence in rejecting unconscionability.

This principle can be observed in Blomley v Ryan. In this case, although no formal reference is made to the necessity of finding knowledge, the court in setting aside the improvident sale of land, stressed on the fact that the enforcer must have known during the negotiation and signing of the agreement that the complainant “was in no fit state to transact business” due to his intoxication.

Likewise, in O’Connor v Hart, unconscionable bargain was only defined by court as “a bargain of an improvident character made by a poor or ignorant person acting without independent advice which cannot be shown to be a fair and reasonable transaction”. The knowledge component was not mentioned. However, relief was not given because the court noted that the defendant acted with a complete innocence throughout and was unaware of the vendor’s unsoundness of mind. The vendor was ostensibly advised by his own solicitor and the defendant had no means of knowing or cause to suspect that the vendor was not in receipt of and acting in accordance with the most full and careful advice.

Similarly, in Nichols v Jessup, the court in rejecting unconscionability held that it was not a case where as a purchaser he either knew or ought to have known that he was taking advantage of any deficiency in the complainant’s understanding of the transaction or mental capacity.

The third group consists of cases where the courts made no express reference to need of the enforcer’s knowledge in principle nor noted on the fact of the knowledge component in accepting or rejecting unconscionability. However, in these cases, wherever unconscionability is found, the relevant knowledge is inferable from the facts of the case.

In Baker v Monk, the court held that the degree of inequality in bargaining power between parties render it necessary for the enforcer to throw further protection around the complainant before he made the bargain with her. Such a comment assumes that the enforcer knew why the lady needed further protection, which is because she suffered some impairment in her self-protective ability. Besides, in cases involving close relationships such as marriage or dependency , the court will generally made assumption that the enforcer ought to know about the enforcer’s special disability.

Sum up from the above three groups of cases, it is safe to say that enforcer’s knowledge of the complainant’s special disability is undoubtedly a necessary element to establish unconscionability. Whether the court expressly mentioned its necessity in the principle, noted its existence on the facts finding or did not discuss about it because it is inferable from the facts, the fact enforcer’s knowledge regarding the complainant’s special disability exists in all successful unconscionability cases prove this element essential.

3.2.2 What amounts to knowledge?

In Nichols v Jessup, the court held that:

“a party may be regarded as unconscientious not only when he knew at the time the bargain was entered into that the other party suffered from a material disability or disadvantage and of its effect on that party, but also when he ought to have known of that circumstance; when a reasonable man would have adverted to the possibility of its existence..”

This shows that the knowledge of the enforcer of the complainant’s special disability is not only limited to actual knowledge but includes constructive knowledge. Actual knowledge
Actual knowledge refers to a direct and clear cognizance of a fact, which is in practice, difficult to prove. Actual knowledge may be shown if the enforcer himself admits that he had the actual knowledge of the complainant’s disability, which is, however, very rare.

Other than that, actual knowledge can be proven by evidence of the actual knowledge. In Stubbs v Erickson, the judge accepted the evidence that the enforcer actually knew that the complainant was heavily intoxicated at the time of contracting.

Besides that, actual knowledge can also be proved by an objective interpretation of the enforcer’s conduct. For example, in Blomley v Ryan, the enforcer’s undue haste to procure a written agreement from an intoxicated man was interpreted by the Court as evidence of the enforcer’s actual knowledge of the complainant’s special disability and of a consequent desire to conclude the matter before the complainant recovered from his temporal intoxication. Likewise, in Portal Forest Industries Ltd v Saunders, the enforcer obtained the complainant’s consent on an agreement where the complainant did not understand the terms of the agreement. When the enforcer was charging the agreement to the third party, he mentioned to the third party that there might be arise some trouble due to the signature obtained on the agreement. Based on these evidences, the court held that the complainant have actual knowledge of the complainant’s special disability at the time of contracting. Constructive knowledge

In most of the unconscionably cases, the knowledge shown was the constructive knowledge. There are 2 methods which this knowledge may be established, which are by inference and imputation. Inference

When evidence shows that the enforcer has known of certain facts which would indicate the complainant’s special disability to any reasonable man, the enforcer’s knowledge of the complainant’s disability will be inferred. This is shown in the various cases below.

In Ayres v Hazelgrow, a dealer purchased paintings and jewellery worth 200 times more than the purchase price (40pounds) from an elderly woman aged 84 who was suffering from severe senile dementia, eccentric in the extreme, and one whom within a very short time would have know that she was suffering from a severe mental incapacity. The enforcer contended that he spoke to the old lady for 40 minutes. Based on these facts, the court held that the enforcer ought to have known of the complainant’s special disability.

In Towers v Affleck, the Court noted that the complainant’s “limited intelligence” would be apparent to any reasonable person who came in contact with her and therefore, the enforcer ought to have constructive knowledge about the complainant’s disability.

Besides that, enforcer having constructive knowledge of the complainant’s special disability may also be inferred if there has been sufficient prior dealing that alerts the enforcer of the complainant’s special disability.

For example, in Stubbs v Erickson, Court held that the enforcer should have constructive knowledge of the complainant’s special disability (she was an alcoholic and had a weak mental condition) due to the fact that the enforcer had been staying next to the complaint for more than a year and had had continual contracts with her. The prior dealings were deemed sufficient.

Likewise, in Knupp v Bell, court held that the contracting parties were old friends and neighbors and therefore it would be amazing if the enforcer did not know of the complainant forgetfulness and disorientation mentioned by so many other witnesses.

Similarly, in Blomley v Ryan and Black v Wilcox, the complainants’ intemperate habits were well known to the people around that area including the enforcer, and therefore the complainant’s intoxicated state must had alerted the enforcer to the fact that the complaint was not fit to negotiate.

Enforcer having knowledge of the complainant’s special disability can also be inferred from the fact of the relationship between the parties or cohabitation. For instance, in Loe v Tylee, the parties have been friends for many years and when the complainant was suffering from Parkinson’s disease, the enforcers assisted him in many ways including providing him meals, transportations and other basic needs of life. Therefore, the deal that the enforcer proposed upon those incidents allowed the Court to infer that the enforcers did have constructive knowledge of the complainant’s disability. Imputation

There are two circumstances which the enforcer is bound to make inquiry if they are aware of facts which would appear to a reasonable person that the complainant suffers from special disability. Knowledge of disability may be imputed if the enforcer fails to do so.

The first circumstance is where the enforcer has special expertise in the particular transaction, such as dealing with the subject matter which the enforcer is experienced in.

For example, in CBA v Amadio, the bank was aware of that the debtor was unable to pay off the debts. The complainants were induced by the debtor into a guarantee agreement with the bank, whereby the complaints thought that the agreement was only limited to $ 50,000 and for only six months but it was in fact, unlimited to amount and time. Therefore, due to the fact that the bank knew about the debtor’s condition and the nature of the guarantee agreement, the court held that the bank was bound to make inquiry as to whether the transaction had been properly explained to the complainants. Knowledge of the complainant’s disability was imputed because the enforcer fails to do so.

The second circumstance in which the courts have been prepared to impute the relevant knowledge is where the improvidence of the bargain is extreme.

For example, in Nichols v Jessup, the court held that the contractual imbalance is so “overwhelming” that the enforcer must have known or suspected that the complainant was suffering from a special disability.
Likewise, in Portal Forest Industries Ltd v Saunders, evidence showed that the complainant was only interested to lease his land for a short period of time and yet he agreed to lease his land to the enforcer for 99 years at a fixed nominal rent. Court held that such improvidence must have alerted the enforcer about the complainant’s disability and the enforcer should have inquire into this matter.

Therefore, as a sum up for this element, enforcer’s knowledge of the complainant’s disability is necessary to establish unconscionability and judicial practices have shown that the courts are ready to accept both actual knowledge and constructive knowledge as to satisfy this requirement.

3.3 Unconscionable conduct.

Cases where unconscionability was successfully established show that unconscionable conduct is an indispensible element to establish unconscionability. Although no cases had expressly mentioned the need of this element in principle, the courts have always noted on the presence of unconscionable conduct of the enforcer in establishing unconscionability, and noted its absence in rejecting unconscionability.

3.3.1 Active victimisation
The most common type of unconscionable conduct is active victimization. As the term suggest, active victimization means a deliberate and conscious act of exploitation of the complainant’s weakness. Examples of active victimization are shown in the cases below.

In Blomley v Ryan, the enforcer’s act of providing a bottle of rum for the complainant during the negotiations for the sale of the land is an act of active victimization. Likewise, in Say v Barwick, the act of the enforcer which consistently drunk the complainant who was an infant daily just before the infant attained his age of majority and woke the complainant up a few hours after the complainant attained his age of majority to enter into a transaction with the enforcer amounts to an act of active victmisation. Similarly, in Paris v Machnick, the act of the enforcer offering to purchase a farm worth $9000 from an illiterate woman for $2,500, knowing that the woman was relying on him to determine the reasonable price of the farm was an act of active victimization.

3.3.2 Passive victimisation
Besides that, from established cases, unconscionable conduct is not only limited to active victimization but also includes passive victimization. Passive victimisation is the acceptance of a benefit in a transaction to the enforcer’s advantage and to the complainant’s loss, with the knowledge of the complainant’s special disability. There are 2 elements to establish in order to prove passive victimization. First is the enforcer’s knowledge of the complainant’s special disability. Second is the enforcer’s awareness of the contractual imbalance. This is shown in the following cases.

In Growden v Bean, court held that the enforcer’s acceptance of transaction that was tantamount to a gift constitute an unconscionable conduct as the enforcer knew about the special ability of the complainant and the improvidence of the bargain. Likewise, in Harris v Richardson, the act of the experienced money-lender of agreeing to purchase the complainant’s annuity was held to be an unconscionable conduct due to the fact that he knew about the contractual imbalance and the special disability of the complainant.

As a contrast, in Alec Lobb (Garages) Ltd v Total Oil GB Ltd, the enforcer after valuing the land sincerely believed that he was buying with a realistic price and had no reason to believe that he was buying at an undervalue was noted by the court in rejecting unconscionability.

3.4 Contractual imbalance

Contractual imbalance or substantive unfairness signifies terms which are more favourable to one party and improvident against the other party. From cases, all unconscionability cases involved certain degree of contractual imbalance. What is then the required degree to satisfy this requirement?

Some cases suggest that the standard of reasonableness is used in determining whether it amounts to contractual imbalance. For example, in Multiservice Bookbinding Ltd and Others v Marden, court held that the element of contractual imbalance is established if no “sensible, well-advice person”, would have agreed on the terms. Likewise, in Portan Forest Industries Ltd v Saunders, court held that there exists contractual imbalance if no “reasonably prudent person” would have agreed on the terms.

However, in actual judicial practice, the standard seems to be higher than the standard of reasonableness. The enforcer must have had obtained a manifest disadvantage over the complainant in order for the court to set aside the transaction on the ground of unconscionability. Examples can be seen in the following cases.

In Black v Wilcox, the land was sold at $5,200 instead of $25,000. Likewise in Junkin v Junkin, the vendor sold his land for a quoter of its value. In Ayres v Hazelgrove, the complainant sold paintings worth 6,000- 7,000 pounds for 40 pounds. In Harry v Kreutiziger, a fishing boat worth $16,000 was sold for $4,500. In Harris v Richardson, a life interest in a sum of 7,250 pounds was sold for 1,750 pounds. In Pridmore v Calvert, the complainant released a claim which proved to be worth over $20,000 for $334.

Moreover, in Gaertner v Fiesta Dance Studios Ltd et al, a young lady entered into 6 agreement purchasing a total of 551 hours of dancing lessons which in her situation impossible for her to finish within a reasonable time amounting to contractual imbalance.

Furthermore, in Morrison v Coast Finance Ltd, an elderly 79 years old widow (complainant) mortgaged her only substantial asset, her home, to borrow a small sum of money for not for herself but for other impecunious debtors. The enforcer (bank) knew about the fact and yet allowed the transaction was held to have taken a manifest disadvantage over the complainant.

On the other hand, in Lott v Angelucci, the complainant sold the property worth $54,000 for $ 35,000 to the enforcer for the consideration of the help given by the enforcer over years was held to be a fair bargain. Likewise, in Knupp v Bell, the court took into account of the relationship of the parties which is as neighbours and friends and held that the slight undervalue is acceptable. Similarly, in Haverty v Brooks, although the complainant could have sold the property at a higher price, the court held that the transaction was not manifestly unfair as it was the complainant himself who trusted the enforcer that the enforcer will be paying the installments of the purchase price on time so that he could have the payment as his pension and keep secret from his relatives.

From the above cases, it is clear that the imbalance or unfairness needs to be manifest to satisfy the requirement of contractual imbalance. The court will take into account of other factors and considerations to determine whether the consideration given is insufficient to the extent that the requirement of contractual imbalance is satisfied.

3.5 Failure to rebut the presumption of unconscionability

When all the 4 elements discussed above are satisfied, the presumption that unconscionability is established. The burden is then shifted to the enforcer to rebut the presumption. Failure to do so leads to the establishment of unconscionability. This is shown in the cases below.

In the case of Valta v Valta, even though the 4 elements are fulfilled, the enforcer was able to show that the complainant had obtained an independent advice which was appropriate and thus the court held that the bargain which was not too improvident, was not unconscionable. As a comparison, in Fry v Lane, the court held that the transaction was unconscionable because the solicitor did not inform the complainant about the nature and effect of the transaction.

The 2 most common grounds used to rebut the presumption of unconscionability are the recommendation of independent advice to the complainant and the full disclosure of the material facts and consequence to the complainant.

As for recommendation of independent advice, some cases suggest that the enforcer should go to the extent of insisting the complainant to obtain an independent advice and refuse to continue with the transaction until the complainant had done so. This can be sad seen in the case of Knupp v Bell and Harris v Richardson .

Another ground that may be used by the enforcer to rebut the presumption unconscionability is the disclosure of material facts and nature of the transaction. This can be seen in the case of Cresswell v Potter, where Justice Megarry said that it would not be difficult for the enforcer to send a cover letter to the complainant to disclose about the consequence of the transaction.

Likewise, in Pridmore v Calvert, the court held that the experienced party should explain the nature of a bargain to the persons who are inexperienced and ignorant in that particular area, which is the area of insurance and indemnity law in this case. Similarly, in CBA v Amadio, the court held that the bank was guilty of an unconscionable conduct by entering into the transaction without disclosing important facts which may cause the complainant to change their mind and without ensuring that they obtained an independent advice.

3.6 Conclusion for elements

From the above discussion, it is now clear that there are 5 core elements of unconscionability. Cases had shown that failure to fulfill one of them will make the complainant fails to prove unconscionability.

Source: Essay UK - http://lecloschateldon.com/essays/law/elements-of-unconscionability/

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