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Unconscionable conduct

Information about when a contract may be invalid because one party has behaved unconscionably, such as by using undue influence.

A contract may not be valid if both parties have not freely consented (agreed) to the contract being made. Consent must be freely given and parties must have a proper understanding of what each of the parties are doing.

Undue influence

Proper consent may be affected if one party acting unconscionably by using undue influence. The contract will not be binding on the parties if it can be established that proper consent was not given. This might happen if one party to the contract has behaved unfairly or unconscionably, by taking unfair advantage on the weakness of the other party to the extent that it cannot be said that the other party intended voluntarily to enter into the contract. The main reason for the rule against the use of undue influence is to correct abuses of trust and confidence. It is applied where the parties are in a relationship where one party may be able to exercise considerable influence over the other party.

There are 2 types of undue influence:

  • where no special relationship exists
  • where parties in a confidential relationship.

No special relationship

Undue influence may happen where the stronger party use some kind of fraud or wrongful act expressly to take advantage of the weaker party. It is up to the weaker party to prove that the other party used undue influence.

Parties in a confidential relationship

This is the most common form of undue influence. A confidential relationship exists where one party's position towards the other party involves a dependency or trust in the form of authority, or an expectation to give fair and independent advice to the weaker party.

Where a confidential relationship is found to exist, there will be a presumption of undue influence. It is then up to the stronger party to show that the contract was not the result of undue influence.

Establishing a confidential relationship and undue influence

Firstly the parties may be in a well recognised special relationship, such as: solicitor and client, doctor and patient, religious or spiritual advisor and devotee. If the special relationship is not from a well recognised category, then the weaker party must show that the other party was in a position of influence. For example, it could be a relationship between a bank and its customer, because of the special position of trust that the bank had come to occupy in connection with the conduct of the customer's financial affairs.

Note: In ordinary circumstances there would be no presumption that undue influence arises our of a banker-customer relationship.

See Commercial Bank of Australia Ltd v Amadio [1983] HCA 14.

What happens if undue influence is established?

If undue influence is established then the contract may be held voidable at the election of the wronged party.

Unconscionable conduct in providing goods and services

Under common law

Corporations are prohibited from engaging in unconscionable conduct in relation to the provision of goods and services. The Australian Consumer law expressly prohibits a person from engaging in unconscionable conduct within the meaning of the unwritten law. This is referring to case law, or common law as has been interpreted by the courts. The lead cases in this area are the Amadio case and 'Collection house'.

Two requirements must be satisfied for this to apply:

  • one party to the contract must be under a special disability (such as poverty, sickness, age, sex, infirmity of body or mind, drunkenness, lack of education, lack of assistance or explanation where assistance or an explanation is necessary
  • the other part takes unfair advantage of that disability, either with knowledge of that disability or where they have 'closed their eyes' to that disability.

See:

Breach of the Australian Consumer Law

In addition to the prohibition of unconscionable conduct under common law, the Act expressly states that a person must not engage in conduct that is unconscionable, all circumstances considered. This provision is broader as it does not require the claimant to establish that they were at a special disadvantage before the court could recognise that unconscionable conduct had occurred.

This also goes beyond the formation of the contract itself but can extend to the way that the contract is carried out or the contract' terms. This could include the way a party exercises their rights under the contract or the way they behave once a contract is made. It may relate to the way that a contract is renewed, renegotiated or terminated.

It may also apply to conduct involving systemic patterns of behaviour and not just to individual transactions or events.

Examples of matters the court may take into account:

  • the bargaining powers of each party
  • if the buyer had to comply with conditions that were not reasonably necessary for the protection of the seller
  • if the buyer understood the documents relating to the agreement
  • whether any unfair tactics were used against the consumer or whether there was undue influence
  • the price, and circumstances where the buyer could have bought the goods or services elsewhere
  • whether the seller's behaviour was similar with other buyers
  • any applicable industry codes and if consumer reasonably believed this code would apply
  • if the seller failed to disclose any risks or conduct that may affect the buyer
  • if there was a contract between the parties, the contract terms, whether the terms were negotiable and if parties complied with the terms
  • the extent to which the parties acted in good faith.

See ss. 21, 22—Competition and Consumer Act 2010 (Cth)—Schedule 2—The Australian Consumer Law.

Unconscionable conduct in the provision of financial services

Similar protections apply to a person in connection with financial services under the Australian Securities and Investments Commission Act.

See ss. 12CB, 12CC—Australian Security and Investments Commission Act 2001(Cth).

More information

Legislation

The Australian Consumer Law

  • Part 2-2—Unconscionable conduct
    • s. 20—unconscionable conduct within the meaning of the unwritten law
    • s. 21—unconscionable conduct in connection with goods and services
    • s. 22—matters the court may consider in relation to unconscionable conduct relating to goods and services

See Competition and Consumer Act 2010 (Cth)—Schedule 2—The Australian Consumer Law.

Australian Securities and Investment Commission Act 2001 (Cth)

  • s. 12CB—unconscionable conduct in relation to financial services
  • s. 12CC—matters that the court may have regard to in relation to unconscionable conduct in relation to financial services

See Australian Security and Investments Commission Act 2001(Cth).

Case law

Commercial Bank of Australia v Amadio

Facts: An elderly couple signed a guarantee with the bank on behalf of their son. At the time they believed that their son's business was doing well, but in reality it was in financial difficulties. The bank helped the company appear to be doing well, by selectively some honouring cheques that overdrew the account. When the con's company failed, the bank sought to enforce the guarantee against the Amadios.

Held: The guarantee was set aside by the court as unconscionable. The court held that the guarantee was manifestly disadvantageous to the Amadios and that the bank must have been aware of this and took no steps to ensure that the Amadios were properly advised in relation to the transaction.

See Commercial Bank of Australia Ltd v Amadio [1983] HCA 14.

Collections House Ltd v Taylor

This case concerns a debt that was statute barred.

Facts: An employee from a debt collection business contacted Taylor in 2001 about a debt that Taylor had incurred in 1992. The employee claimed that if the debt was not paid, that the business would consider taking legal action against Taylor. Taylor then agreed to pay $5000 to settle the debt. The following day Taylor sought advice from a financial counsellor who advised Taylor that the debt had been statute barred before the conversation (that is, happened so long ago that it could not be enforced, although time starts again potentially lifting the statue bar once Taylor had acknowledged the debt).

The debt collection business was aware that Taylor was in difficult personal and financial circumstances at the time of the contact.

Held: The Supreme Court upheld VCAT's finding that the debt collection business had engaged in unconscionable conduct in breach of a provision in the Fair Trading Act, which has now been replaced by the Australian Consumer Law. The court found that Taylor had been at a 'special disadvantage' because of her lack of knowledge of the matters at issue and that the debt collector had wrongly exploited its position of advantage.

See Collection House Limited v Taylor [2004] VSC (3 March 2004) and Old debts.

Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 (28 March 1956)

This case was an appeal against a decision by the trial judge to dismiss an application for specific performance to honour a contract of sale.

In this case an elderly man who was of 'failing intellect' and who had been drinking heavily agreed to sell his large sheep property for significantly less than its value. The seller's drinking habits were well known about the town, particularly at shearing time. He often drank to the point where he was incapable of transacting even the simplest business matters. It was argued that the contract was unfair, concluded in undue haste without adequate advice being given and that the purchaser had contributed to the defendant's drunken conditions (lured him into drink...). Moreover, the purchasers and agents involved must have been aware that the 78 year of man was in no condition to transact business and it would be inequitable to allow the other party to enforce the contract.

Fullagar J, (at 9) in dismissing the appeal, describes the range of circumstances adversely affecting a party, which may induce a court of equity to either refuse its aid or to set a transaction aside to include: poverty of 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. He also mention that inadequacy of consideration would usually be an important element in cases of this type.

See Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 (28 March 1956).

Reference

Fitzroy Legal Service

Fitzroy Legal Service's Law Handbook has information about buying and selling and the law of contracts.

See How contract law works.

Updated