Unconscionable Contracts: A review of the Law on Duress and Undue Influence

Duress has been defined as “a threat of harm made to compel a person to do something against his or her will or judgment; especially a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition.”[1] On the other hand, undue influence is defined as “the improper use of power or trust in a way that deprives a person of free will and substitutes another’s objective”[2]

 

Contracts have been indicated to be unconscionable when they are harsh and comprise of an unfair bargain between the parties.[3]  Unfairness may be procedural or substantive[4] in that it may be based on terms in the contract or on the process which led to the conclusion of the contract.

 

In order to determine that a contract is unconscionable, “coercion of the will” of the disadvantaged party must be established.[5] This essentially means that a certain amount of pressure is exerted by the ‘stronger’ party to ensure that the other party accedes to the terms of the contract. This pressure, however, must be illegitimate and thus encouragement by a person of influence over a party does not suffice.

 

Inequality of bargaining power arises where there is a “manifest and unfair disadvantage”[6]. Unconscionability is measured by three factors: there must be an oppressive bargain, the claimant must be in a disadvantaged position and the ‘stronger’ party must act unconscionably.[7]

 

The doctrine of unconscionability seeks to protect the disadvantaged party and relies on the principle set in Alec Lobb (Garages) Ltd v Total Oil (Great Britain) Ltd[8] in which the court stated that “courts will not stand by and allow the strong to push the weak to the wall”. Contracts which have been found to be unconscionable have historically been rescinded and courts proceed to order restitution in favour of the disadvantaged person.

 

However, freedom of contract with regards to English law was often seen to override the consideration on fairness of a contract.[9] Additionally, Courts have relied on the established principle that “consideration must be sufficient but need not be adequate”[10] in determining that parties should be allowed to set the terms under which they intend to contract. However, strict reliance on the doctrine of freedom of contract has resulted in unjust outcomes.[11] As such, courts must carefully consider the circumstances of a case before making its determination.

 

Research shows that subtle forms of duress may be unrecognizable by courts, such as duress to goods or economic duress.[12] The court must therefore make an extra effort to ensure that it understands the underlying issues and that in the scheme of it all, ensure that the parties’ intentions are not interfered with while at the same time protecting the weaker party.

 

Courts have set aside contracts on the basis that the party who was found to be disadvantaged in the transaction had not received independent advice before consenting to enter into the transaction. It may be either that the advice was offered by the dominant party or that both parties had the same advisor which creates a conflict of interest[13]. This is particularly where the transaction appears to be largely in favour of the dominant party. Banks[14] should ensure that the borrowers are aware of the risks and ensure that where they do not understand the transaction, they take independent advice.[15]

 

Independent legal advice would only be material where the terms of the contract are negotiable and both parties are placed in a position where they can discuss and agree without either party ‘bullying’ the other into conceding. Where the disadvantageous terms are highlighted by the advisor such as an advocate and are not amended despite the insistence of the advisor, the contract may still be considered unconscionable.[16]

 

Due to the increase in the volume of lending, the probability of banks being sued due to the failure to ensure that borrowers understand the terms in a contract or procure independent legal advice are high. Where a lending institution does not take precaution to ensure that the terms of the transaction are understood by the borrower, the transaction may be voided if found by a court to be extortionate and unfair.

 

The doctrine against unconscionable contracts enables such a party who finds himself tied to a contract by the shacks of duress or undue influence to avoid the contract if it is found to be unfair, exorbitant and extortionate. However, in the modern age where information is freely accessible, it should be encouraged that parties undertake the appropriate due diligence and avoid entering into contracts which they do not fully understand. Accordingly, the doctrine of caveat emptor may be used as a defence by a respondent against whom it is claimed took advantage of the claimant’s ignorance since persons are expected, unless forced or threatened, to ensure that they have sufficient information before committing to a transaction.

Stella is an Advocate of the Kenyan High Court

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[1] B. A. Garner, Black’s Law Dictionary (9th edn, West Publishing Company, Thompson Reuters 1990)

[2] Ibid

[3] H.G. Beale and others, Chitty on contracts: Vol. 1: General principles (28th edn, Sweet & Maxwell 1999)

[4] G.H. Treitel, The Law of Contract (11th edn, Sweet & Maxwell 2003)

[5] E. McKendrick, Contract Law (4th edn, Palgrave Law Masters 2000)

[6] [1985] A.C. 686

[7] H.G. Beale and others, Chitty on contracts: Vol. 1: General principles (28th edn, Sweet & Maxwell 1999)

[8] [1985] 1 WLR 173, 183

[9] Ibid

[10] G.H. Treitel, The Law of Contract (11th edn, Sweet & Maxwell 2003)

[11] L. Boldeman (2007) The Cult of the Market : Economic Fundamentalism and its Discontents (Canberra: ANU Press)

[12] E. McKendrick, Contract Law (4th edn, Palgrave Law Masters 2000)

[13] [1975] Q.B. 326

[14] [1997] 1 All E.R. 144

[15] H.G. Beale and others, Chitty on contracts: Vol. 1: General principles (28th edn, Sweet & Maxwell 1999)

[16] Boustany v Piggott [1995] 69 P & C.R. 298