Unconscionable Bargains

Negating Contracts by Pressure and Influence

An agreement to which consent is not freely given may be invalid. However, the categories of pressure which will invalidate an agreement are limited. Agreements are frequently entered under economic and personal pressure. Such ordinary pressures will not avoid a contract.

There are a number of circumstances in which agreements may potentially be invalidated by pressure. There are three main categories of case.The principle applies both to contracts and deeds.

The first category often called “duress” requires that there is pressure such as to completely negate consent to the contract. The second category of cases referred to as undue influence may apply to transactions between persons who are in a relationship of trust. The third category comprises so called unconscionable bargains. These are extreme cases of unfair dealing.

Unconscionable Bargains

The law holds persons to contracts entered, in the absence of limited negating factors, which are set out in other articles. An agreement is generally binding, notwithstanding extreme inequality of bargaining power, resources or education. The bargain need not be equal, proportionate or in any way balanced. Apart from the consumer unfair contract regulations, the law generally upholds unfair contracts.

An unconscionable bargain is a harsh transaction where one person is in a much stronger position than the other. The court may exercise equitable powers to vary or set aside the transaction. It must be shown that the stronger party knew that the innocent party was at a disadvantage.

It is a necessary element that the party obtaining the benefit of the exchange knows of the other person’s vulnerability. Unconscionability is required. The courts have been reluctant to define this concept in detail. It is sometimes described as equitable fraud. However, it does not require deliberate wrongdoing, such as to constitute criminal fraud or even a civil wrong. An equity must be raised against the party receiving and retaining the benefit of the exchange. It must be unconscionable for him to retain it.

It is a necessary element that the party obtaining the benefit of the exchange knows of the other person’s vulnerability.

Features of Unconscionable Bargain Cases

The principles are generally applied in private and domestic transactions. They are rarely available in commercial transactions.

The imbalance in the agreement may arise from inadequate consideration, unfair pressure, impropriety or the lack of independent advice. The conduct might be described as sharp practice. There may be elements of misrepresentation.

The element of disadvantage may depend on circumstances, education, illness or other factors.  There must be an element of victimisation, taking advantage or overreaching.

In order to uphold the contract, the stronger party must show that it was in fact just and reasonable.

Nature of Disadvantage

The party adversely affected by the agreement may be under a disability or disadvantage sufficiently serious to make it blatantly unfair to allow the “contract” to stand, in circumstance where the other person knew or ought to have known of this position.

The disadvantage may arise from physical illness, illiteracy, lack of education, vulnerability, infirmity of mind, drunkenness or their equivalent. It may arise from any circumstances which may impair the ability of a person to exercise rational and independent judgment.

Mere inequality of bargaining power is not enough.  There must be an unconscionable misuse of power arising out of the circumstances.  It is not enough that the bargain is unfair. There must be unconscionable dealings.

This might be shown in the case of an elderly, vulnerable person.  For example, such a person may enter a contract with or make a gift or transfer to another more informed person, which is so improvident that no reasonable person would so do. Where this is allied with an element of sharp practice, the stronger party is required to justify the transaction. This principle rarely applies in commercial and business settings.

Vulnerable Relationships

Where there is a relationship of trust or confidence by which the stronger party takes advantage of the weaker party, the courts of equity may regard an impugned transaction as unconscionable.

any of the Irish cases have involved an elderly relative or stranger, transferring his principal asset to a younger person by way of gift or for no obvious benefit. There can be an overlap with undue influence in these cases.

The cases often involve a financially astute person bargaining with a highly vulnerable person, typically inexperienced and possibly illiterate. The circumstances may be accentuated, where the stronger party’s solicitor acts for both.

The principles have been applied to bank guarantees, where an elderly, infirm or otherwise vulnerable person acts as a guarantor, wholly against his commercial interests. It may be invalidated where the bank is aware of this position.

Overlap with Undue Influence

The principles that afford relief from unconscionable bargains are is broadly similar to and in some cases  may overlap that of undue influence. The principles  may apply where a party stands in relation to another, such that he can take undue advantage of the other whether by distress or recklessness or want of care. In these circumstances, a transaction based on unconscionable dealing will be readily set aside.

The principles of unconscionable bargains are many respects broader than undue influence.  The will of the weaker party is not necessarily overborne. What is involved is an unconscionable taking advantage of the weaker party’s position. It focuses on the bargain itself.

It does not require a prior relationship between the parties from which undue influence may be presumed nor a particular relationship in which undue influence is in fact exercised.

Broader Concept of Inequality of Bargaining Power

Some courts have indicated that there may be a general principle of unconscionable bargains which require transactions between parties to be justified in cases, where there is a gross inequality of bargaining power.

The prospect of a broader principle of inequality of bargaining power was raised in England by Lord Denning in the 1970s in the famous Lloyds Bank v Bundy case. This approach was later disapproved of, by the House of Lords.

The courts in have largely rejected a general principle of inequality of bargaining power. However, they will examine carefully a gift or transaction for manifestly inadequate consideration, where there is a discrepancy in age, position or strength. The court may raise a presumption of undue influence in such circumstances, regardless of the existence of a prior relationship.

Slightly Broader Approach in Ireland

The Irish courts, particularly based on the older 19th-century equitable cases mentioned above, have suggested that there may be greater scope for a broader principle of inequality of bargaining power in Irish law. The Irish courts in the 19th century gave relief against highly unconscionable bargains in some limited types of circumstances.

Many of these cases involved expectant heirs, who were pressurised by immediate circumstances, typically when young (but of full age), to dispose of their future rights on extremely unfavourable terms.

The Irish courts have continues to go further than other jurisdictions in relation to unconscionable bargains. Many of the Irish cases have involved elderly vulnerable persons entering bargains, disposing of most of their assets, commonly farms. Where the bargain is particularly improvident, independent legal advice will not necessarily save it.

Upholding the Bargain

Where there appears to an unconscionable bargain, the person obtaining the advantage of it must show that it is fair and reasonable. He must  prove that the seller entered the agreement freely. The requirement will generally be satisfied by adequate and complete independent legal or other advice.

The relief against unconscionable bargains is equitable. Therefore, it is at the discretion of the courts. As would other equitable remedies, there is no automatic entitlement. A delay may be a bar to relief.

Consumer Credit Act

Consumer credit legislation provides that certain consumer credit agreements, hire purchase and leasing agreements may be set aside if their terms are unduly harsh and unconscionable.

Under the Consumer Credit Act, consumer credit agreement (other than housing agreements may be reconsidered (or opened) by a court. The court will have regard to  the total cost of credit, the prevailing interest rates, age, business competence, literacy, the degree of risk and security and other factors.

The court may vary the contract so as to do justice between the parties. It may relieve the consumer party of payments of sums in excess of that which ought fairly to be due. It may set aside the contract in whole or part. It may order repayment of sums paid under the agreement.

References and Sources

Irish Textbooks and Casebooks

Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch.13

Friel, R. The Law of Contract 2nd Ed, (2000)

McDermott, P.  Contract Law (2001) 2nd Ed (2017) Ch14

Enright, M. Principles of Irish Contract Law (2007)

Clark and Clarke Contract Cases and Materials 4th Ed (2008)

English Textbooks and Casebooks

Poole, J. Casebook on contract law. (2014) 12th edition

Stone and Devenney, The Modern Law of Contract 10th Ed (2015)

McKendrick, Contract Law 10th Ed (2013)

Chen-Wishart, Contract Law 5th Ed (2015)

Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)

Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.

Chen-Wishart, M. (2015) Contract law. 5th Ed.

Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.

Duxbury, Robert (2011) Contract law. 2nd Ed.

Halson, Roger (2012) Contract law. 2nd Ed.

Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)

O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)

Peel, and Treitel, The law of contract. 13th Ed. (2011).

Poole, J.Casebook on contract law. 12th Ed. (2014).

Poole, J.  Textbook on contract law. 12th Ed. (2014)

Richards, P Law of contract. 10th Ed. (2011)

Stone, R.  The Modern law of Contract. 10th Ed. (2013)

Treitel, G. H.  An outline of the law of contract. 6th Ed (2014).

Turner, C Unlocking contract law. 4th Ed. (2014).

Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).

UK Casebooks

Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)

McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)

Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)

Burrows, A. S.  A Casebook on Contract. 4th Ed.

Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)

Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)

UK Practitioners Texts

Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)

The above are not necessarily the latest edition.