Unfairness

No general principle controlling unfairness in contracting

Piecemeal solution (Bingham, Interfoto)

Viation by doctrines focusing on blameworthy conduct --> misrepresentation & duress

Vitiation by doctrines focusing on C's defective consent --> mistake, frustration, incapacity

Vitiation in less obvious cases of impairment and blameworth inducement which may still vitiate contracts --> undue influence (abuse of relationships of trust and confidence); doctrine protecting non-commercial bargaiing parties who guarantee another's debts; unconscionable bargains (exploitation of bargaining weaknesses)

Two conflicting ideas --> fiction of equality and reality of inequality

Traditional justification = procedural unfairness -->defective consent of 'weaker' C; reprehensible conduct of 'stronger' D

Substantive unfairness more conspicuous --> relief from improvident transactions granted to bargaining impaired

• equitable doctrine
• distinguishable from duress in not requiring applciation of illegitimate pressure
• distinguishable from undue influence in not requiring a relationship of influence between parties
• requirements for relief stated in leading modern case of Boustany v Pigott (1993)
  • C must be nder an operative bargaining impairment, placing it at serious disadvantage vis-a-vis the other party
  • D must have exploited C's weakness in a morally culpable manner
  • resulting transaction is manifestly improvident to C
  • C lacked adequate advice

Basis of doctrine

• modern view that prevention of unconscionable conduct is true basis
• conernt to protect vulnerable non-commercial parties from manifest substantive unfairness provide best explanationf or relief granted  (Chen-Wishart)
  • substantive unfairness is necessary condition for relief
  • substantive unfairness is best predictor of unconscionability
  • substantive unfairness determines our conception of procedural unfairness

What must be proved?

Improvident transaction

• extreme unfairness of transaction usually clear
• mere undervalue is insufficient --> must be overreachng and oppressive or entail such substantial under value that it 'shocks the conscience of the court' (Alec Lobb (Garages) Ltd v Total Oil (GB) Ltd (1983)

Bargaining impairment

• originally to protect heirs --> extended to 'poor and ignorant' --> stretched to encompass members of 'the lower income group' and the 'less highly educated' (Cresswell v Potter)
• all types of personal and circumstantial weaknessess may adversely affect a party's bargaining power --> lies dormant  until activated by serious substantive unfairness

Unconscionable conduct

• actual fraud is unneccesary --> constructive fraud is enough
• includes passive acceptance of benefit in unconscionable circumstances
• active victimisation includes
  • taking initiative in transaction
  • haste in concluding transaction
  • contributing to a misapprehension without creating it
  • low-level pressure on C to agree
• passive victimisation 
  • acceptance of highly advantageous bargain at expense of C known to be impaired without bringint it to notice of other party or advising them to get advice
  • knowledge of impairment may be constructive 

Absence of adequate advice

• shows that C was not protected by anyone else equal to the tast and that D failed to take adequate steps to meet C's known weakness
• transaction not saved simply because
  • D has recommended independent advice if C's refusal to obtain advice is interpreted as evidence of his impairment (Bank of Montreal v Stuart
  • C has received independent advice if court concludes that advice was inadequate or severity of C's impairment rendered him incapable of benefitting from it
• Credit Lyonnais v Burch --> illustrates relationship between grossly unfair outcome and independent advice element

Problem and policies

• where a wife induced to guarantee debts of husband (or his company) by husband's undue influence, misrepresentation or pressure, can lender enforce guarantee against wife?
• arguments for enforcement
  • wife should take responsibility for apparent agreement to guarantee
  • wife may stand to benefit from loans to her husband, particularly if financially dependent on him
  • husband not lend who has behaved reprehensibly
  • such ending is socially and economically useful by unlocking wealth tied up in family home for commercial purposes
  • lenders reluctant to lend if lack confidence in enforceability of securities
• arguments against enforcement
  • marriage relationship provides scope for abuse when one party may use unconscientious means to induce spouse to guarantee his loan (Etridge)
  • Guarantor isusually peripheral to loan negotiations, only brought in at last minute so in no real position to assess wisdom of guarantee
  • lender is or ought to be aware of risk of abuse
  • guarantor's economic interests not identical to primary debtor's
  • homelessness with attendant social problems should be avoided

Legal response

• seminal case --> Barclays Bank v O'Brien
• clarified in Royal Bank of Scotland v Etridge
• titled balance towards commercial certainty in favour of anks 
• guarantee unenforceable if
  • some vitiating factor affects dealing between guarantor and primary debtor
  • lender knows guarantor not acting commercially and transaction is for benefit of primary debtor
  • lender has not taken reasonable steps to ensure guarantor properly advised

Vitiation by primary debtor

• C must show guarantee vitiated by debtor's misrepresentation, undue influence or other legal/equitable wrongdoing
• Etridge cautions against being too ready to find this in husband and wife situation

Lender's notice

• Etridge has established that -->
  • relationships of influence = infinitely various and lenders cannot be expected to evaluate emotional relationship between debtor and guarantor --> simply required to take reasonable steps where relationship is non-commercial
  • lender has notice that transaction for debtor's benefit if guarantee relates to his debts or debts of his company --> even if guarantor is nominally a shareholder, director or secretary of company, since not reliable indicators of her real involvement in conduct of business --> loan ony for joint purposes if guarantor actively involved in managing company and is paid for it to point of interest being substantive, rather than titular --> but not if negotiations are conducted by primary debtor and guarantor plays no part
• knowledge of these two facts alert lender to initiate administrative procedure that does not require difficult and sensitve judgment calls

Lender's failure to take reasonable steps

• ordinary case = reasonable steps to satisfy that guarantor understands nature and effect of transaction
• enough for lender to
  • communicate directly with guarantor
  • disclose necessary financial information to solicitor
  • obtain confirmation from her solicitor
• lender need not observe steps if guarantor already knew details or had reason to believe already knew details
• if solicitor = unprofessional or incompentent, matter is between guarantor and solicitor
• lender protected even if solicitor has potential conflict of interest
• if solicitor believes transaction not in g best itnerst, should give advice to that effect but not veto it (noramlly)
• abnormal cases --> lender may have to take further steps
  • may know facts indicating higher risk of undue influence, duress or misrep by debtor
  • lenders proceed at own risk --> must take appropriate extra steps
    • insisting on legal advice genuinely independent of debtor or lender
    • informing debtor's solicitor of any facts giving rise to lender's heightened suspicion that g's consent may be imporperly obtained

The remedy --> primary relief = rescission of guarantee subject to usual bars)

The exploitation of a relationship of influence to obtain an undue advantage (R v AG for England and Wales (2003)

Basis of doctrine

• Unconscientious conduct
  • reprehensible conduct in inducing C's agreement
  • to ensure influence of one person over another is not abused (Etridge)
  • Counterpoint --> uncertaint (seldom clear what D has done wrong); unnecessary; contrary to authority (inconsistent with Allcard)
• Defective consent
  • 'excessive' or 'morbid dependency' --> judgment impaired to exceptional degree
  • counterpoint --> uncertain and contrary to authority (impossible to draw line between appropriate and inappropriate dependency); unrealistic (novice in Allcard did not lack autonomy and consent wasn't impaired; trusting is not pathological (not subnormal to trust)
• Failure to protect
  • preferring own interests and failing to protect those of C (Etridge)

Overview and burden of proof

• Traditional categories --> set out in Allcard and refined in Etridge
  • Class 1: Actual undue influence --> C can prove D's positive application of pressure inducing his consent to contract
  • Class 2: Presumed undue influence --> C's proof that
    • in relationship of trust and confidence with D (automatic or proved)
    • resulting transaction is manifestly disadvantageous to C
• Raises presumption that can be rebutted by D's proof that C nevertheless entered transactin freely
• Etridge stated
  • not too much emphasis on distinction between categories
  • burden of proof lies on C throughout
  • C proves undue influence, either actually or with benefit of evidential presumption that remains un-rebutted

Failure to protect by overt pressure

Relational pressure

• D's overt exploitation f C's relational motivation for consenting --> number of forms:
  • threats to abandon
  • excessive control, secrecy and exclusion of others
  • bullying, confrontation and harassment

Relationship of influence and manifest disadvantage

• proof of actual undue influence traditionally thought to dispense with need for two elements necessary for inference (presumption)
• counterpoint --> relationship is what makes otherwise low lever coercion legally relevant; outcome determines whether pressure was 'due' or undue'

Failure to protect by omission

Burden of proof

• evidential presumption --> burden of proof not reverse
• inference is not that D has exerted undue pressure on C but that he has preferred his own interests and failed to safeguard C's

Relationship of influence: automatic presumption

• certain relationships = irrebutable legal presumption of existence of relationship of influence
• relationships include
  • doctor and patient
  • solicitor and client
  • parent and child
  • guardian and ward
  • trustee and beneficiary
  • religious advisor and disciple
  • man and fiancee (but not husband and wife)

Proved relationship of influence

• often an element of exclusivity in relevant relationship --> from C's side expectation that D will give conscientious advice in C's interst --> puts guard down and may not consciously self-protect or seek outside advice --> D knows of and has participated in relationship, raising obligation to restrain self-interest and have regard to C's interests when transacting with him
• enough that in past dealings C generally reposed trust and confidence in D
• typical examples =
  • wife and husband; parents and adult child; great-uncle and great nephew; elderly man and his housekeeper-companion; customer and bank; pop singer and manager; elderly farmer and farm manager; junior employee and employer
• reliance may be exacerbated by C's illness or frailty, incompetence or inexperience
• may arise in one-off dealing
• unfairness of transaction provides strong evidence of relationship of influence --> Credit Lyonnais
• if apparent disadvantageous transaction is explicable no inference will be drawn --> Re Brocklenhurst's Estate (1978)

A transaction calling for explanation

• unfairness of transaction raises inference that relationship of influence has been exploited
• formerly called 'manifest disadvantage' (necessity and importance affirmed in Etridge but phrase criticised)
• 4 relevant considerations can be deduced from case law
  • impact on C's future autonomy --> transactions entailing such extreme degree of improvidence that they threate C's future autonomy e.g. loss of C's home or vast proportion of their wealth
  • consistency with nature of parties' relationship
  • consistency with C's relationship with others
  • explicability of any apparent improvidence

Rebutting the presumption

• D must show C's consent to transaction was  'full, free and informed' (Zamet v Human (1961)
• usually by showing C received adequate independent advice (but can be proved other ways)
• C's understanding of transaction is necessary but not sufficient (Etridge)
• weighty piece of evidence = extent of unfairness (inexplicability) in transaction --> court may infer from degree of disadvantage to C that:C's refusal to get or follow independent advice indicates continuing impact of undue influence (Bank of Montreal v Stuart); any advice received by C was inadequate (Inche Noriah v Omar); C did not adequately understand the transaction (Hammond v Osborn)

Rescission for undue influence

Bars -->

• operation of rescission inc bars are same as that which is applicable for misrepresentation
• may be barred by: C's affirmation of contract; lapse of time after cessation of influence; if TP acquires interest in subject matter of contract as good faith purchaser; if impossible to effect mutual restoration of benefits received

Defence of change of position -->

• reduces C's recovery on rescission to protect good faith D's expenditure in reliance on security of receipt
• never been overtly applied in a contract case
• consistent with dicta in Allcard v Skinner

No partial rescission --> stated in dicta in Glanville v Glanville (2003)

• basis for invalidating contract
• need to protect those whose self-protective abilities are impaired to an unacceptable degree must be balanced against interests of those who have dealt fairly and in good faith with incapacitated party --> legal consequences vary
• recognised categories of incapacity
  • children
    • can enforce contract but not bound until 18
    • exceptions for those who deal in good faith and fairly with child and to let children enter beneficial contracts
  • mental incapacity, drink and drugs
    • under Mental Incapacity Act 2005 cannot make valid contract 
    • due to mental infirmity, drink and drugs renders contract voidable if C can sow his incapacity was known to other party
    • lesser impairments by those who are sane are subject to doctrine of unconscionability
  • companies and public authorities
    • limiting capacity of such non-natural persons is necessary to protect those on whose behalf the act
    • limited by its objects contained in the memorandum of association --> acts outside are ultra vires and void --> abolished in regards of parties who deal in good faith with them
    • public authorities powers confined by functions for which they were created --> ultra vires = void

• limited by its objects contained in the memorandum of association --> acts outside are ultra vires and void --> abolished in regards of parties who deal in good faith with them
• public authorities powers confined by functions for which they were created --> ultra vires = void

General doctrine has developed in other common law jurisdictions under banner of unconscionability but English law prefers piecemal solution

Policy arguments --> 5 overlapping reasons for piecemeal solution

• common law prefers cautious incremental extensions by analogy to existing categories to the recognition of general broad principle
  • counter --> desirability fo recognising general principle which highlights similarities underpinning apprently discrete categories and identifies inconsistencies or gaps amongst the 'islands or intervention' calling for re-examination

• would create unacceptable degree of uncertainty and instability in contractual dealings
  • counter --> current piecemeal solution is hardly certain eg. lack of clarity about basis of some doctrines --> overaching class won't dispense with need to carefully identify the different species and chart their particular features
• not court's role to redistribute wealth
  • counter --> concerns to avoid unfair results cannot be excluded from contract law --> many laws already concerned with fairness
• Parliament's job to regulate contractual fairness
  • counter --> examples of statutory regimes which express a policy from which a principle can be derived being used analogically in developing common law
• would undermine freedom of contract
  • counter --> Many limits already accepted on freedom of contract e.g. rules controlling contents of contract

Would facilitate rational development of rules, which conform to standards of fair and reasonable people
By giving contracting parties greater security against risk of opportunism ad exploitation, it may also make parties more willing to embark on otherwise risky ventures

Form and substance

• doctrine of good faith
  • key component under some other jurisdiction and international restatements of contract law
  • BUT no consistent conception of contents of good faith --> English courts would have to play active role in shaping content
• concept of 'unconscionability'
  • common law roots --> successful in other common law jurisdictions e.g. AUS, NZ
• Denning's doctrine of inequality of bargaining power
  • cool reception by judges BUT mirrors elements of unconscionability doctrine

Open-textured elements of doctrines of unconscionability provide unifying concept for number of distinct rules dealt with under different headings, and contribute to greater consistency in law by exerting pressure on incompatible rules

Challenge to identify contents of a doctrine of unfairness --> consistent with unconscionability, law's concern clusters around 3 factors: substantive unfairness; bargaining weakness; exploitation of that weakness

Standards = broad an qualitative rather than detailed and quantitative --> courts must be left to develop specifics on case by case basis

Shaping of discretionary principle through case-by-case adjudication within defined analytical framework, as opposed to current 'list' approach

Controversial issue = whether substantive unfairness is legitimate target for the law