The principle that a court may refuse to enforce a K that is unfair or oppressive b/c of procedural abuses during the K formation or b/c of overreaching contractual terms. One can look at fairness by examining the outcome or the process. Better to argue unfair process in unconscionability.
Procedural Unconscionability: results from improprieties in K formation rather than the terms of the K itself. For example, is there unequal power, influence or bargaining power? Does someone make a decision they wouldn’t otherwise make? Does one party with superior knowledge take advantage of the other?
Substantive Unconscionability: results from actual K terms that are unduly harsh, commercially unreasonable, and grossly unfair given the circumstances.
Q: What’s wrong w/ standard form K? A: E.g. of one party having monopoly of information and consumer has no ability to determine if K is fair.
Limits of Freedom of Contract (Trebilcock):
Must determine if the contract is unconscionable based on the results of K. One way to measure fairness of K is to look at the type of exchange:
Paretian Principle: Pareto exchange requires that both parties gain something from the exchange, does not matter if exchange is unequal.
Gordley’s Proposal: each side’s gain must be equal in value (equality of exchange). Problem: equality of exchange is subjective; ignores wants/needs and there can be non-monetary reasons for exchange.
Types of incapacities:
Transactional incapacity: one knows of the other’s inability to deal with a complex transaction and exploits that incapacity by inducing the other to make a bargain that a person who had the capacity would not make.
Unfair Persuasion: use of bargaining methods that impair the free and competent exercise of judgment and produce a state of acquiescence that the promisee knows or should know is likely to be highly transitory.
Problems with standard form K:
Not usually negotiated
No real consent
One party imposes terms upon another
Manifestation of monopoly: reduction in transaction costs.
Imperfect information is provided in the contract.
Two kinds of standard form K:
Mercantile transactions: presumption that terms are fair and reasonable due to equality of bargaining power.
Ticket cases – regular consumers: NO presumption of fair terms; terms are dictated by a party who has the bargaining power.
Lloyds Bank v. Bundy [Bargaining Power]
Bundy, an elderly farmer, was induced by his son’s bank to sign a guarantee of his son’s indebtedness by mortgaging farm; had no independent legal advice; son’s business went under; bank trying to take D house. B claims he did not know what he was doing.
Court: in vast majority of cases, those who sign guarantee will be bound but there are exceptions; is need to have uniting principal regarding when to set K aside; there a number of categories when courts give relief:
Duress of goods: strong party has them, weak needs them-K is voidable.
Unconscionable transaction: person in special care and protection, weakness is exploited.
Undue influence: a) wrongful act; b) relationship of power/confidence (fiduciary) give rise to presumption of undue influence; used to gain advantage.
Undue pressure: where special relationship is abused (lawyer-client, parent-child, doctor-patient).
Salvage agreements: rescuer is in strong bargaining position. Only void if manifestly unjust.
All categories have single thread: “inequality of bargaining power”. Other shares elements include: lack of independent advice MAY be fatal (linked to undue pressure), inadequate terms, bargaining power grievously impaired, and undue influence or pressure. Where there is inequality of bargaining power and terms are unclear, then court may set aside.
Elements of unconscionability in this case:
Terms patently unfair; no one would mortgage house for more than it’s worth.
Relationship between bank and father was one of trust and confidence; where father’s natural affection had much influence on him.
Lack of independent legal advice.
Conflict of interest between bank and father. Bank did not suggest that father get independent legal advice.
Inequality of bargaining power.
Remedy: K is set aside. Fiduciary duty existed b/w bank and Bundy.
When bargaining power is grievously impaired and there is undue influence or pressure (not equated with wrongdoing).
Independent advice will not always save such transactions.
In this case, no independent advice, unfair terms, thus K not enforceable.
National Westminster v. Morgan [Undue Influence]
Bank agreed to provide loan because difficulty meeting mortgage. Morgan’s wife had to sign it but did so with some hesitation. They defaulted on payment. Mr. Morgan died. Bank trying to get possession of house. Mrs. Morgan arguing undue influence.
Court: No undue influence b/c no duty owed. When presumption of undue influence exists, have to prove was used to procure advantage or was wrongful - and also have to have unfair terms. Prove unfairness to argue undue influence or lack of independent advice.
Bank/customer relationships not one which normally gives rise to presumption of undue influence.
Real tool is undue influence-not as Bundy suggested (i.e., inequality of bargaining power). Principle in Bundy too broad and it should not apply to commercial transactions; this is matter for legislature to consider.
Here, no unfair terms, banker did what was expected of him (discharged presumption of undue influence) and no duty on bank to ensure she had independent advice. Nothing wrong with this deal and even with independent advice; would have done same thing-thus contract is enforceable. Must look at circumstances of each case.
Undue influence with disadvantageous transaction.
Macaulay v. Schroeder Music [Restraint of Trade]
Young songwriter entered into standard form K with publishers. P gave exclusive services and power of renewal/termination/publication in D hands— K can be classified as a “restraint on trade”. P brings motion requesting declaration this is against public policy and void.
Court: “Was bargain fair?”; test is objective (look at all provisions of K):
Test for fairness: Are restrictions both reasonably necessary for the protection of the legitimate interests of the promisee and commensurate with benefits secured to promisor under the K? – need to look at economics of business to determine fairness. What does it cost to promote? What are the returns?
Is it in line with industry standards (economics of the industry)
When there is restraint of trade, courts closely scrutinize for unconscionability (onerous terms a factor to determine if undue influence).
Ask whose interests involved in restraint of trade? Company b/c restrains songwriter from selling songs on open market. Protects songwriter from unfair use of bargaining power by company.
Here, K is unenforceable. Case really about inequality of bargaining power; applying Bundy-unfair use of monopoly power. Here, court was prepared to intervene b/c process unfair. OR
LOOK TO LEGISLATION FOR RELIEF FOR LOANS
Unconscionable Transactions Relief Act
Protection where if cost of loan is excessive and transaction is harsh and unconscionable then courts can:
Re-open transaction;
Relieve the debtor;
Order creditor to repay excess;
Set aside, wholly or in part, revise or alter the agreement.
Legislature is basically giving the courts the power to do what the earlier cases had been doing. Problem still defining what is unconscionable and harsh BUT act does say look at all the circumstances to determine unfairness.
