English Contract Law - Cancelling The Contract - Unconscionability

Unconscionability

While the law on disclosure and misrepresentation aims to make contracting parties informed (or not disinformed), the law on "unconscionable" bargains says agreements may be avoided when, in a very general sense, a person's free will was impaired. Complete exercise of "free will" is rare for most people, because they make choices within a constrained range of alternatives. The law still holds people to nearly all contracts (if consumer, employment, tenancy, etc. legislation is not activated) except where someone was under duress, unduly influenced or exploited while in a vulnerable position. Like misrepresentation, the victim may avoid the contract, and the parties restore their property to reverse unjust enrichment, subject to the victim's claim for damages, so long as none of the four equitable bars to rescission lie (i.e. no excessive lapse of time, affirmation of the contract, intervention of an innocent third party's rights and counter-restitution is possible). The most straight forward claim, for duress, involves illegitimate threats. The common law long allowed a claim if duress was of a physical nature. So long as a threat is just one of the reasons a person enters an agreement, even if not the main reason, the agreement may be avoided. Only late in the 20th century was escape allowed if the threat involved illegitimate economic harm. A threat is always "illegitimate" if it is to do an unlawful act, such as breaking a contract knowing non-payment may push someone out of business. However, threatening to do a lawful act will usually not be illegitimate. In Pao On v Lau Yiu Long the Pao family threatened to not complete a share swap deal, aimed at selling their company's building, unless the Lau family agreed to change a part of the proposed agreement to guarantee the Paos would receive rises in the swapped shares' prices on repurchase. The Laus signed the guarantee agreement after this threat, and then claimed it was not binding. But the Privy Council advised their signature was only a result of "commercial pressure", not economic duress. The Laus' considered the situation before signing, and did not behave like someone under duress, so there was no coercion amounting to a vitiation of consent. However, contrasting to cases involving business parties, the threat to do a lawful act will probably be duress if used against a vulnerable person. An obvious case involving "lawful act duress" is blackmail. The blackmailer has to justify, not doing the lawful act they threaten, but against a person highly vulnerable to them, the demand of money.

Parallel to the slow development of common law duress, the courts of equity allowed escape from a contract if any form of undue influence was used against a contracting party. "Actual undue influence" is now essentially the same thing as duress in its wider form. In these "class 1" cases, a claimant proves they were actually put under undue influence. Most relevant are the cases on "presumed undue influence", of which there are two sub-classes. "Class 2A" cases involve someone being in a pre-defined relation of trust and confidence with another, before which they enter a very disadvantageous transaction. In Allcard v Skinner, Miss Allcard joined a Christian sect, the "Protestant Sisters of the Poor", run by her spiritual adviser, Miss Skinner. After taking vows of poverty and obedience she gave the sect almost all her property. Lindley LJ held that if she had not been barred from the claim by letting 6 years lapse, it could be presumed that Miss Allcard was unduly influenced and she would have been able to rescind the transfer. Other class 2A relationships include doctor and patient, parent and child, solicitor and client, or any fiduciary relation (but not wife and husband). Where the relation does not fall into one of these, it stands with "class 2B" cases. Here, a claimant may first prove that there was in fact a strong relation of trust and confidence. If that is done, and there is a disadvantageous transaction, it will be presumed to result from undue influence. It will then be up to the recipient of the property to rebut the presumption. This takes on greatest significance in cases involving banks typically lending money to a husband for his business, and securing a mortgage over the husband and wife's jointly owned home. Significant problems arose, particularly after the early 1990s housing, stock market and currency crashes, where the husband's business failed, the bank attempted to repossess the house, and the wife claimed she never understood the implications of the mortgage or was pressured into it. Even though a bank may have played no illegitimate role, if it had "constructive notice" of undue influence (i.e. if it was aware that something was potentially wrong) the bank would lose its security and could not repossess the house. In Royal Bank of Scotland plc v Etridge (No 2) the House of Lords decided that in such situations a bank should ensure that the spouse has been independently advised by a solicitor, who in turn confirms in writing there is no question of undue influence, before giving out a loan.

As opposed to duress and actual undue influence, where illegitimate pressure is applied, or presumed undue influence which depends on a relationship of trust and confidence being abused, further cases allow a vulnerable person to avoid an agreement merely on the basis that they were vulnerable and exploited. In The Medina the Court of Appeal found that a group of pilgrims shipwrecked on a rock in the Red Sea did not need to pay £4000 they promised to a rescue ship, because the "rescuers" had exploited the pilgrims vulnerable position. To prevent unjust enrichment, the Court substituted an award of £1800. Similarly, in Cresswell v Potter, Ms Cresswell conveyed her ex-husband her share of their joint property in return for release from mortgage repayments, later making him £1400 profit. Because Potter took advantage of Ms Creswell's ignorance of property transactions, Megarry J held the agreement was voidable. One potential exception to this pattern, and now very heavily restricted, is the defence of "non est factum", which originally applied in favour of illiterate people in the 19th century allowed a person to have a signed contract declared void if it is radically different from what was envisaged. In Lloyds Bank Ltd v Bundy, Lord Denning MR proposed it was time that all cases be placed into one unified doctrine of "inequality of bargaining power". This would have allowed escape from an agreement if without independent advice one person's ability to bargain for better terms had been heavily impaired, and would have essentially given courts broader scope to change contracts to the advantage of weaker parties. The idea was disapproved by some members of the House of Lords from 1979. There is specific legislation, such as the Consumer Credit Act 1974, the Landlord and Tenant Act 1985, or the Employment Rights Act 1996 which create targeted rights for vulnerable contracting parties, in the same way specific legislation circumscribes a duty of disclosure and good faith. The common law, subject to the existing exceptions, nevertheless retains an essential foundation of freedom of contract.