This essay will examine briefly the various doctrines and evaluate whether or not unconscionable contracts can be adequately covered by the doctrines of duress and undue influence and propose to provide cohesion in unfair contracts. Detailed examination of the development of the latter two doctrines is beyond the scope of this document but to decide one must examine the requirements for each of the three areas. It being trite law that the principle of freedom of contract is a basic and consistent tenet in the law of contract however the common law doctrine of duress and the equitable doctrine of undue Influence along with the limited instances where unconscionable contracts have been set aside, along with other breaches, misrepresentation, fraud, mistake, frustration, have been used as defences to protect those subject to unfair contracts.
‘There is the vigilance of the common law which, while allowing freedom of contract, watches to see that it is not abused.’
Richard Stone in The Modern Law of contract defines Duress as, ’Physical threats or other illegitimate pressure being used for an improper objective which are sufficiently serious to vitiate consent.’ Interestingly he mentions that where there has not been any overt threat but out of fear, that is considered, an implied threat, this is covered under undue influence.
Over time the elements which needed to be present have been refined and include, ‘…such a degree of coercion that the other party was deprived of his free consent and agreement’, also in Pao on v Lau Yiu Long according to Lord Scarman, the success of a claim required the person allegedly coerced to have protested, to have had no other alternative and to have been independently advised. The pressure needs to be illegitimate yet may be lawful actions.
Establishing what is illegitimate has proven to be difficult which is highlighted in the article, “When David meets Goliath’ where the author speaks to coercion, in ‘many forms’ but which ‘…threats, designed to exert pressure…to secure his or her cooperation, generally fall in a category that the law would consider to be hard bargaining, but not illegal’ but that, ‘At some point…coercion becomes objectionable’
In the case of undue influence to date there still has not been any specific and real definition of the term. However, it has been helpfully described in The Law of Contract.
‘In a court of equity if A obtains any benefit from B, whether under a contract or as a gift, by exerting an influence over B which, in the opinion of the court, prevents B from exercising an independent judgement in the manner in question, B can set aside the contract or recover the gift. Moreover, in certain cases the relation between A and B may be such that A has peciuliar opportunities of exercising influence over B. If under such circumstances A enters into a contract with B, or receives a gift from B, a court of equity imposes upon A the burden, if he wishes, to maintain the contract or gift, of proving that in fact he exerted no influence for the purpose of obtaining it.’
This establishes what needs to happen for undue influence to be present. Undue influence, as opposed to duress, relates to situations where a relationship of some sort exists and where some pressure, improperly applied, resulted in an unfair advantage. The doctrine’s two limbs, class; Actual, and class 2: Implied , the latter is separated into two categories; that of a special relationship between the parties and those where no special relationship exists but where a relationship involving trust and confidence gives rise to a presumption of undue influence, as demonstrated in Lloyd’s Bank v Bundy or cases where a transaction ‘calls for an explanation’.
It is accepted that unconscionability is still developing in the UK and that the courts will use other vitiating factors and doctrines to provide protection from unfair contracts.
Examination of the approach both in Australia and the United States provides greater insight as in those jurisdictions, unlike in the UK, this area of the law has not only been further developed but is also entrenched in statute.
An excellent descriptions and explanation was found in an Australian Journal which states:
‘Unconscionability does not have a fixed meaning in law, but in contractual context it is generally used to describe situations in which it is believed that, although no duress or fraud took place, one contracting party took advantage of the other party’s weakness by extracting an unfair bargain. The test for unconscionability is thus partly procedural and partly substantive (i.e. it looks at procedural unfairness as well as substantive unfairness)…the English court’s general acceptance of this broader doctrine is still shrouded in uncertainty…while the English courts have rarely been willing to apply such a doctrine outside a limited class of cases, they have also been unwilling to renounce it entirely…’’
In the UK the cases where this concept has been accepted and applied typically involve expectant heirs , and the poor and ignorant,. The latter having been further developed and refined in the more recent case of Creswell but still construed more narrowly than in other jurisdictions.
This evinced by the reaction of the courts, The House of Lords in National Westminster v Morgan and Lord Scarman’s scathing remarks in Pao On, to Lord Denning’s’ attempt to link the imbalance of the parties bargaining power with the abuse of that imbalance.
But there is acceptance that unconscionable bargains include both types of fairness and perhaps this explains the reluctance of the English courts to apply this doctrine widely. In Hart v O’Connor Lord Bingham said:
‘“If a contract is stigmatized as ‘unfair’, it may be unfair in one of two ways. It may be unfair by reason of the unfair manner in which it was brought into existence…”procedural unfairness”…in some contexts…”unfair” by reason of the fact that the terms of the contract are more favourable to one party than to the other…Equity will relieve a party from a contract which he has been induced to make as a result of victimization. Equity will not relieve a party from a contract on the ground only that there is contractual imbalance not amounting to unconscionable dealing.’
Substantive fairness, the end product of the negotiations, the terms of the contract, and that which the courts have traditionally protected fiercely as being the purview of the parties. However again the court in an even more recent case Lord Millett appears to have established an even broader concept that in some instances the courts may infer impropriety ‘…from the terms of the transaction itself.’
Nicola Howell argues coherently for the introduction of substantive fairness in Law noting that the, ‘…reluctance to provide relief for substantive injustice reflects a pre-occupation with freedom and certainty of contract, the notions underpinning classical contract theories.’
It is evident that substantive fairness is the most significant difference between cases concerning unconscionable bargains and those of duress and undue influence and that this might best be dealt with through legislation. Though some is already in place it is arguable that it is inadequate.
The other element which appears to be controversial and underdeveloped in UK law is that of the concept of good faith. It has been established in other jurisdictions that good faith is essential and which in both Australia and the United States is entrenched in code.
The Australian Uniform Commercial Code and the Restatement of Contracts speaks respectively to ‘every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement, and that ‘every contract imposes upon each party a duty of good faith and fair dealing in its performance’.
In the article “When David Meets Goliath’ the authors express the view that, ‘Good faith appears to be a fundamental building block of agreements, applicable to virtually all contracts and expressly non-disclaimable.’ And most importantly draws attention to the importance of this concept in the three (3) doctrines that we are examining here, and also highlights that:
‘Reaching an agreement without committing or falling prey to undue influence, fraud, duress, unconscionability, or violations of various consumer protection statutes does not end the law’s scrutiny. Having entered into a contract, the parties assume obligations to perform and enforce their duties in good faith.’
We are advised by Dean that the European Union in its 1993 Directive combines the requirement of good faith and imbalance, and speaks of the lacuna in UK law, ‘‘English law has continued to approach issues of unconscionability , by means of a haphazard collection of disparate doctrines.’ and states that, ‘…there is a clear duty to bargain in good faith. There is as yet no concept of fair and open dealing, or a duty to trade fairly…’:
Lord Justice Bingham described good faith as being most aptly conveyed by colloquialisms such as “playing fair”, “coming clean” or “putting one’s cards face upwards on the table”, concluding that it “is in essence a principle of fair and open dealing”. But indicated that it was preferable if the concept continued to develop by way of ‘“piecemeal solutions in response to demonstrated problems of unfairness”.
Yam Seng Pte Ltd v International Trade Corporation Ltd, in 2013 gave some hope for the opening of the door for a general duty of faith being adopted, particularly as it related to ‘relational contracts’ and which was followed in MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt, where the High Court took the view that, ‘the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced’.
But in two subsequent appeals the Court of Appeal overturned MSC and stated, in the other, that, ‘if the parties want to impose a duty they must do so expressly.’ Even further in another case the Court of Appeal said that ‘the implication of a duty of good faith will only be possible where the language of the contract, viewed against its context, permits it. It is thus not a reflection of a special rule of interpretation for this category of contract.’
The judgment made it clear that there is no general duty, ‘recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences’ but that, ‘the better course is for the law to develop along established lines than to encourage judges to look for what the judge called in this case “some general organising principle” drawn from cases of disparate kinds’ and that:
“a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement”.
The concept of good faith is present in a limited way in statute and the status in English Law is still uncertain evinced by the different approaches and findings of the courts in these recent decisions.
Another major difference lies in the primary remedies whereas in duress and undue influence the contract becomes voidable and may be set aside by the victim but in the case of unconscionability the contract continues to bind the parties unless it is not possible for performance to continue without the unfair terms, the Blue pencil test. In this UK practice the ‘illegal’ terms is removed and based on public policy the contract, as amended, may be allowed to continue.
It is evident that overall the two most significant gaps lie generally in the areas of the approach to substantive fairness, and good faith and the remedies. There appears to be some gloss generally by the English courts on unconscionability and a general reluctance to accepting that inequality of bargaining power as a common thread has been identified.
The three doctrines address in different ways and with different approaches different aspects of unfairness. Waddam states:
‘Several generations of common lawyers have been educated in the belief that the common law of contract admits no relief from contractual obligations on grounds of unfairness, or inequality of exchange…the law of contract, when examined for what the judges do, as well as for what they say.’ shows that relief from contractual obligations is in fact widely and frequently given on the ground of unfairness…The law of contract, like the legal system itself, involves a balance between competing sets of values. Freedom of contract…stability, certainty, and predictability. But, important as these values are, they are not absolute, and there comes a point where they “ face a serious challenge.” Against them must be set the value of protecting the weak, the foolish, and the thoughtless from imposition and oppression.’
He states further in relation to protecting the weak, ‘Of more general significance are the cases in which there was no weakness of intellect. but simply an undue advantage taken of inequality of bargaining power.’
In unconscionability, arguably, the categories of persons, expectant heirs, and the poor and ignorant, inevitably have an inferior bargaining power in any contractual dealings.
In duress, there inequality of bargaining power must exist for one party to be able to successfully coerce another yet the other cannot walk away.
Undue influence exists because of a special relationship or one of trust and confidence which is taken advantage of and which again shows that there is an inequality in bargaining power evident. Broadly speaking the ability to exert any influence over another, to their detriment, would suggest that one is stronger than the other.
Inequality of bargaining power, it could be argued, is the antithesis of the established principle of freedom of contract and in Bundy, Lord Denning bravely and with much foresight, attempted to establish a doctrine which he felt would encompass all acts considered to be unfair in the formation of a contract, but which was specifically disallowed in Pao On on the basis that there was no necessity for a doctrine of inequality of bargaining power. Yet the courts consistently speak of contracts needing to be fair, just and reasonable.
Bicknell J, ‘I have to ask myself whether the bargain that was made was so inequitable, so unjust, and so unreasonable that the court cannot allow it to stand…” This at a time when freedom of contract was a paramount consideration in the English courts.
Relief ‘founded upon the presumption that the parties did not stand on equal terms…’
As early as 1818 it was recognized and stated that:
‘A court of equity will inquire whether the parties really did meet on equal terms; and if it be found that the vendor was in distressed circumstances, and that advantage was taken of that distress, it will avoid the contract.’
So, when the courts speak to unfairness, including the end product, it certainly seems to be that of the courts interfering because of an imbalance in bargaining power, whether because of competence, capacity, position in society or industry, intelligence or education of the victim, or for any of the other reasons given.
Denning, in Bundy cleverly in my view, saw the link between all the doctrines, concepts and principles and likened them all to the principle that, ‘[I]t is not right that the strong should be allowed to push the weak to the wall’.
Within the five (5) categories that Denning identified which would fall within a cohesive doctrine he included, ‘Duress of goods’ ; ‘Unconscionable transactions’ ; ‘Undue Influence’ and ‘Undue pressure’ . This would certainly give rise to the view that there is not only an underlying similarity across all the doctrines but that the common thread is inequality of bargaining power.
Lord Scarman speaks of transactions at arm’s length but could this be faulty reasoning particularly if one examines definitions of arm’s length.
Also, contrary to Scarman’s criticisms, the concept expounded by Denning MR, below, does not appear to be based solely on inequality of bargaining power but on a combination of this underlying inequality, coupled with the actual application of some other improper act:
‘English law gives rise to one who without independent advice enters into a contract upon terms which are very unfair or…when his bargaining power is grievously impaired by reason of his own needs and desires, or by his own ignorance or infirmity, coupled with undue influence or pressures brought to bear on him by or for the benefit of another.’
Dean espouses the significance the EU places on not only good faith but also imbalance between the parties.
This notion of inequality in strength, and thus bargaining power, of the parties, in unconscionable conduct and agreements, is also recognised and supported by other authorities in Australia and the United States.
In the article “When David Meets Goliath” the author coherently combines the different doctrines with the thread of imbalance.
Dean also discusses in length some of the differences in the approach by Australia and the Uk which is useful in this discussion as it links many of the concepts which are not accepted openly in the UK but which argue convincingly for this cohesion of the doctrines and principles and which also expounds for entrenchment in law. He notes that Australian courts are permitted to ask questions to help in evaluating if unconscionability is present, and the lacuna in the UK of which he says, ‘English law has continued to approach issues of unconscionability , by means of a haphazard collection of disparate doctrines…’
Though a different approach to that which is being suggested in this paper Alias and Ghadas urge, ‘A New approach to Unconscionability’, it points to the similarities between undue influence and unconscionability and suggests a merger of the two under Unconscionability, which they argue is a ‘broader notion’.
Thus, it begs the question why would the courts be willing to interfere in the bargain in certain instances yet be reluctant to embrace a cohesive doctrine which could halt the haphazard development which continues, allow the law to develop, even incrementally, without sacrificing the necessary component of certainty?
Therefore, contrary to that expressed by the courts in other criticisms of Denning’s position in Bundy , the writer is of the view that as an alternative to trying to uneasily place unconscionability within duress and undue influence that a general doctrine of Unequal Bargaining power should be developed. Conceptually it should be able to encompass all aspects of unfair contracts not already covered by statute. This would include all the possible combinations of the vitiating factors in all types of unfair contracts, including procedural and substantive fairness, thus providing an all-encompassing solution to ensuring that contracts are Fair, Just and Reasonable and that the courts have a coherent response to and remedies for instances where an inequality of bargaining power seeks to deprive a victim of fairness.
As can be seen from this discussion there are both differences and similarities in the doctrines and the somewhat stunted development has led to confusion, uncertainty and rigidity.
It is therefore safe to conclude that in its present state the law of duress and undue influence, even if legislation is enhanced in certain areas, would not be adequate to cover unconscionable contracts. The main areas which would need to be further evaluated and developed being the incongruence of the remedies, the aspect of a general duty of good faith, acceptance of substantive fairness as an element and a willingness to accept the thread of inequality of bargaining power which, it could be argued, could be the factor which provides cohesiveness and simplicity in the law on unfair contracts.