Test Cases And Financial Services

Test Cases And Financial Services

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Test Cases And Financial Services

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Test Cases And Financial Services

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The assumption under common law is that all parties are equal; however, circumstances arise under which one party may have a more dominant bargaining power and would use this to induce the other to enter the contract (Latimer, 2012, p. 388). A party that uses their superiority to pressure the other party into a contract exhibits harsh conduct which is against good conscience; this is unconscionable conduct also referred to as exploitation (ACCC, 2017). The following essay will outline the characteristics of this doctrine and its effects on the enforceability of any contract found to have been formed by unconscionable conduct. It will various cases in which courts have expressed the willingness to depart from the norm and challenge contractual dealings in the basis of unconscionability. Through this, it will be able to highlight the significance of this concept to contract law. Additionally, the paper will highlight legislative provisions in support of this concept and the effect of this law and equitable principles on banks and other institutions that would have superior bargaining power in transactions. The essay will also address the role of consumer advocates groups as well as any emerging issues in Australia that illustrate unconscionable conduct among vendors and other institutions. All in all, the essay aims to illuminate the concept of unconscionability, its effect on contracts and why it is an important principle to be considered.
Unconscionability and its effect on contracts
Unconscionability emerged as an equitable doctrine in which one party, considered more dominant in the contract, takes unfair advantage of the other’s vulnerability resulting in the subsequent transaction being in favour of the superior party at the expense of the other (Andrews, 2015, p. 287).  Although similar to the doctrine of undue influence, this doctrine does not require that an established relationship exists between the parties. The origin of the doctrine at common law was to protect heirs as well as “poor, ignorant and necessitous” individuals from exploitation (Andrews, 2015, p. 311). Contracts found to have arisen from unconscionable conduct can be set aside; however as established recently in Evans v Lloyd (2013), certain factors must be established for a court to rescind a contract on these grounds.
One of the earlier recognitions of this doctrine was in Lloyd’s Bank Ltd v Bundy (1975), where Lord Denning outlined that the principle of “inequality of bargaining power” had arisen in the case. He described it as where the claimant, in this case, had entered into a contract which consisted of unfair terms and was subsequently convinced to transfer property and a grossly low consideration due to his inferior bargaining power and undue influence from the other party (Virgo, 2015, pp. 278-79). In Australia, the doctrine is well developed, first based on common law principles and eventually on statute. In Blomely v Ryan (1956), the court refused to grant the claimant specific performance as it was discovered that firstly the defendant was old and suffered from serious effects of drinking. Additionally, the consideration offered was significantly inadequate. The court, in this case, relied on the characteristic that the contract placed the defendant at a clear disadvantage against the claimant; as such the contract was set aside.
Australian law, however, recognises Commercial Bank of Australia v Amadio (1983) as the key case establishing the equitable principle of unconscionability in the country. In this case, the defendants were an elderly Italian couple that had been residing in Australia for well over forty years. So as to support their son’s development company, the couple took out a mortgage on their home so as to guarantee their son’s loan with the bank in question. Unfortunately, the son’s company’s accounts had not been doing well despite him presenting otherwise. Shortly after the mortgage, the company went into liquidation and the bank sought payment from the Amadio’s as guarantors. When this was not forthcoming the bank sought to exercise its power of sale over their property. It is important to note that the couple were not fluent in English and had very little formal education and additionally knew nothing of business. Furthermore, prior to signing the agreement as guarantors, their son had made them believe that their liability was only $50,000 for six months. The majority of the trial judges believed that the couple had a great disadvantage against the bank based on these facts and as such that the transaction demonstrated unconscionable conduct and by the principles of equity the guarantee was set aside (Clarke, 2013).
The position in CBA v Amadio (1983) has been reiterated in future cases; in one instance a claimant who had been infatuated with the respondent convinced her that she suffered from depression and that she would be served with an eviction which would trigger her to commit suicide; convinced, the respondent agreed that he buy her a house but in her name. However, when the relationship had come to its end years later, the claimant sought to recover the house and as such brought the matter before court for relief. The courts, both on trial and appeals, held that the claimant has created an environment that made the respondent vulnerable to his advantage and as such made her an emotional dependent; this amounted to unconscionable conduct and it would be unfair for him to recover the house (Louth v Diprose, 1992). More recently, in Kakavas v Crown Melbourne Ltd (2013), the claimant sought to recover over $20 Million which he had lost to gambling at the respondent’s casino in a span of eight months. Mr Kakavas claimed that the casino had taken advantage of his gambling problem arguing that this was a special disadvantage as per s 51AA of the Trade Practices Act (TPA) and later s 20 of the Australian Consumer Law (ACL) 2010. The courts denied his claim holding that, although the claimant did, in fact, have a gambling problem, he could not demonstrate that the institution had taken advantage of this, or knew of his, disadvantage (Bigwood, 2013, p. 467). He failed to demonstrate that Crown Melbourne Ltd was acting beyond the conduct expected of them.
The aforementioned cases and many more, outline certain characteristics to consider in demonstrating unconscionable conduct before a court. According to Lord Hardwicke, unconscionable conduct involves the existence or presumption of fraud from the terms of a contract where one party appears vulnerable and the other employs unreasonable interest or extortion in taking advantage of the aforesaid vulnerability (Earl of Chesterfield v Janssen, 1751). At common law, there are three major factors to consider in identifying unconscionable conduct. Firstly, the vulnerable party must demonstrate a special disadvantage either based on age, gender, financial status, ignorance, foreign language, inexperience, illness among others; Blomely v Ryan (1956) also considered drunkenness. Secondly, the dominant party must be aware of this disadvantage and conduct themselves in a manner that unfairly uses it to their benefit (Latimer, 2012, p. 390); this was illustrated in Westpac Banking Corporation v Paterson (2001). However, if the disadvantaged party is well aware of the possible consequences and does not demonstrate any vulnerability then the transaction will not be unconscionable. Where unconscionability is identified in a contract, the effect is to render it voidable at the option of the disadvantaged party, however, various remedies such as restitution, rescission claim for damages also exist (Gillies, 2004).
Unconscionability has evolved from an equitable doctrine into a principle that is recognised under statute as well. The TPA 1974 and the ASIC 2001 sought to prohibit unconscionability on the basis of the equitable principles; the TPA 1974 prohibited corporations from dealing unconscionably under s 51AA and provided remedies to the same. These provisions adopted the common law standing and prohibited unconscionable conduct in finance, trade and commerce. Various territories have also adopted their own statutes which make provisions similar to those under the TPA 1974 to protect vulnerable parties from exploitation. However, the Australian Consumer Law 2010, sought to introduce consistency by introducing provisions that entrenched the doctrine into statute and also expanded it (Clarke, 2013). Under the ACL 2010 ss 21-22, the disadvantaged party may be either an individual or a small business; the conduct must also have occurred during a transaction of trade or commerce. Additionally, the ACL 2010 introduced penalties for unconscionable conduct and outlined other remedies available to aggrieved parties such as injunctions, compensation orders among others (CCH Australia Limited, 2011).
Institutions or corporations are usually taken to have superior bargaining power when engaging with customers or smaller organisations. This is especially true for banks which have been the subject of most cases brought for unconscionable conduct in court. The principle of unconscionability has been a thorn in their side as contracts have been set aside where judges believed that the other party was disadvantaged; this goes contrary to the basic principle of contract law that requires parties to perform the contract. Although previously a worry mostly to banks, the ACCC began pushing its reach into other industry sectors (Horrigan, 2002, p. 73). Additionally, the incorporation of the principle into statute saw an increased risk for commercial institutions as the scope and definition were expanded. Furthermore, the doctrine has led to reforms in the financial services sector through the Financial Services Act and other codes of practice which recognise unconscionability and provide punitive measures for organisations found to be in breach. As such, banks and other organisations have to be cautious in their dealings lest they are found guilty of unconscionable conduct (ACCC, 2017). Recent developments, however, show that courts are willing to consider evidence brought forth by these organisations showing that they were merely acting in their ordinary cause of business in a claim of unconstitutionality (Corrs Chambers Westgarth, 2014).
Consumer advocates groups such as Financial Consumer Rights Council (FCRC) Victoria are faced with a great task in ensuring the protection of vulnerable Australian consumers (FCRC, 2016). The main aim of these groups is to create awareness among consumers on their rights and responsibilities as well as possible avenues for recourse where these rights are infringed. In addition to providing information, consumer advocacy groups also play the role of monitoring trade and commerce practices and speaking out on behalf of the consumer where these practices infringe their rights. As such, with regard to unconscionability, these groups offer advice to vulnerable consumers and create a platform where aggrieved consumers can learn about possible measures for restitution or compensation. Additionally, they monitor commercial dealings so as to ensure institutions do not take advantage of the vulnerability of consumers for profit. They also play an advisory role to governments on areas that require regulation for the protection of consumers. As such, they are like a guard dog to protect consumers and also educate them on their rights from the more dominant bargaining power of institutions such as banks among others. This, in turn, keeps these organisations in check.
The discourse above has illuminated the concept of unconscionability in contract; it has looked into the definitions and characteristics employed by courts and other regulatory bodies tasked with protecting consumers. The essay analysed the development of the doctrine from common law principles, their adoption into Australian law and eventually the incorporation of the doctrine into statute. As highlighted, where a party is found to have taken advantage of another’s vulnerability to induce them to contract under unfair terms, the party may be found liable for unconscionable conduct. The effect of this is to render the contract voidable; the aggrieved party is entitled to various remedies including damages, restitution and injunctions either under the law of equity or statute. Additionally, the willingness of courts to uphold this doctrine and its subsequent enactment into statute has seen many banks and other institutions fall victim to legal proceedings. They have subsequently had to adopt a more cautious approach in their dealings so as to avoid being liable. However, consumers can rely on the law and the efforts of consumer advocates groups to ensure their rights are protected against the superior bargaining power of such institutions.
Reference list
ACCC, 2017. Unconscionable conduct. [Online] Available at: https://www.accc.gov.au/business/anti-competitive-behaviour/unconscionable-conduct [Accessed 4 May 2017].
Andrews, N., 2015. Contract Law. 2nd ed. Cambridge: CUP.
Bigwood, R., 2013. Still curbing unconscionability: Kakavas in the High Court of Australia. Melbourne University Law Review, Volume 37, pp. 465-510.
Blomely v Ryan (1956) 99 CLR 362.
CCH Australia Limited, 2011. Australian Competiton and Consumer Legislation. s.l.:Wolters Kluwer.
Clarke, J., 2013. Unconscionable Conduct. [Online] Available at: https://www.australiancontractlaw.com/law/unconscionable.html [Accessed 5 May 2017].
Commercial Bank of Australia v Amadio (1983) 151 CLR 447.
Corrs Chambers Westgarth, 2014. Court of Appeal denies claim of unconscionability in circumstances where a bank followed its usual practices. [Online] Available at: https://www.corrs.com.au/publications/tgif/court-of-appeal-denies-claim-of-unconscionability-in-circumstances-where-a-bank-followed-its-usual-practices/ [Accessed 5 May 2017].
Earl of Chesterfield v Janssen (1751) 28 ER 82.
Ewan v Lloyd (2013) EWHC 1725.
Ewan, M. & Qiao, L., 2015. Contract Law: Australian Edition. s.l.:Palgrave Macmillan.
FCRC, 2016. Purpose. [Online] Available at: https://www.fcrc.org.au/About/About_FCRC.htm [Accessed 5 May 2017].
Gillies, P., 2004. Business Law. 12th ed. Sydney: The Federation Press.
Horrigan, B., 2002. Unconscionability Breaks New Ground – Avoiding and Litigating Unfair Client Conduct After the ACCC Test Cases and Financial Services Reforms. Deakin Law Review, 7(1), p. 73.
Kakavas v Crown Melbourne Ltd (2013) HCA 25.
Latimer, P., 2012. Australian Business Law. Sydney: CCH Australia Ltd.
Lloyd’s Bank Ltd v Bundy (1975) QB 326.
Louth v Diprose (1992) 175 CLR 621.
Virgo, G., 2015. The principles of the Law of Restitution. 3rd ed. Oxford: OUP.
Westpac Banking Corporation v Paterson (2001) 187 ALR 168.

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