Melbourne University Law Students Society

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Melbourne University Law Students
Society Student Tutorial Service Contracts 730-21
5 (LLB) 733-613 (JD) Julia Wang
Sponsoring Partners Clayton Utz Mallesons
Stephen Jaques Leo Cussen Institute
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DISCLAIMER These tutorials and the notes are
designed to assist students in their learning.
The tutorials and the notes are not a substitute
for the course material, nor should they be
relied upon as representative of the subject
matter of the course. Neither the Melbourne
University Law Students Society nor the student
tutor of these tutorials will take responsibility
for any consequences flowing from the use of the
material provided in the tutorials or in the
notes.
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Contact Details

• Julia Wang
• 3rd Year LLB/BSc student
• julia.r.wang_at_gmail.com
• 0401 336 547

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Outline

• Unconscionable dealing
• Third party (Garcia) unconscionability

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ILLEGALITY
Misrepresentation
Misleading or deceptive conduct
Misinformation
Mistake
VITIATING FACTORS
Duress
UNFAIR CONDUCT
Undue influence
Third party unconscionability (Garcia)
Interference with free choice
Unconscionable dealing
Statutory unconscionability
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Unconscionable Dealing

• Background definition of unconscionability and
  unconscionable conduct
• Unconscionable dealing taking unfair advantage
  of plaintiffs special disability
• Special disability
• Taking unfair advantage
• Fair, just and reasonable
• Causation
• Remedy

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(1) Special Disability

• a condition or circumstance ... which seriously
  affects the ability of the innocent party to make
  a judgment as to his own best interests (Amadio,
  Mason J)
• Examples (Blomley, Fullagar J)
• Poverty or need of any kind
• Sickness
• Age
• Sex
• Infirmity of body or mind
• Drunkenness
• Illiteracy or lack of education
• Lack of assistance or explanation where
  assistance or explanation is necessary
• Other examples
• Limited understanding of English (Amadio)
• Strong emotional dependence or attachment
  (Bridgewater Louth)

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(1) Special Disability (Cont.)

• Mere inequality in bargaining power ? special
  disability (Amadio, Mason J Berbatis)
• Fact that the weaker party has a full
  understanding of what he was doing does not
  preclude the existence of a special disability
  (Bridgewater)

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(2) Taking Unfair Advantage

• (a) Stronger party was or reasonably should have
  been aware of the weaker partys special
  disability and
• (b) Stronger party took unfair advantage of that
  special disability

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(2)(a) Degree of Knowledge

• Actual knowledge of special disability is not
  required (Amadio, Mason J)
• Stronger party need only be aware of (Amadio,
  Mason J)
• Possibility that special disability exists or
• facts that would raise the possibility of a
  special disability in the mind of any reasonable
  person
• Where the stronger party consists of various
  officers of a corporation, it is not always
  appropriate to simply aggregate the knowledge of
  a number of persons individually unaware of
  unconscionable conduct ... to create a notional
  person with an unconscionable intent (Radio
  Rentals)
• However, such aggregation is justified where the
  officers had the duty and the opportunity to
  communicate the information to one another
  (Radio Rentals)

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(2)(b) Taking Unfair Advantage

• Key focus of unconscionable dealing
• The intervention of equity is not to relieve the
  plaintiff from the consequences of his own
  foolishness. It is to prevent his victimisation.
  (Louth, Deane J)
• Examples
• Denying the party under a special disability the
  opportunity of obtaining independent advice
  (Amadio Bridgewater)
• Failure to disclose information that would enable
  the party under a disability to make an
  independent decision (Amadio)
• Seeking assent to contract when it is known that
  the other party is intoxicated (Blomley)
• Manufacturing an atmosphere of crisis when
  there is none (Louth)
• Passive acceptance of a benefit in unconscionable
  circumstances (Bridgewater)
• But hard bargaining in a commercial context
  unlikely to amount to taking unfair advantage
• Parties to commercial negotiations frequently
  use their bargaining power to extract
  concessions from other parties. That is the stuff
  of ordinary commercial dealing. (Berbatis,
  Gleeson CJ)

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(3) Fair, Just and Reasonable

• If (1) and (2) are established, onus is on the
  stronger party to show that the transaction was
  fair, just and reasonable (Amadio, Deane J).
• Adequacy of consideration is often a relevant
  factor in determining whether a transaction is
  fair, just and reasonable
• But not necessarily conclusive (Blomley, Fullagar
  J Amadio, Deane J)

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(4) Causation

• Gould test applies
• Relevance of independent advice

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(5) Remedy

• Equitable rescission
• Similar restrictions to those discussed under
  misrepresentation apply, eg
• Partial rescission where appropriate (Bridgewater
  majority)
• Representee has acted unconscientiously after
  purporting to rescind
• Third parties would be prejudiced
• Representee has delayed in seeking rescission
• Affirmation
• (Argument made in Blomley but unsuccessful)
• Etc...

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Undue Influence v Unconscionable Dealing
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Hypothetical Stanley Somber

• Monaro contract
• Mistaken identity (unilateral mistake at common
  law)
• Rebuttable presumption that each party intends to
  deal with the person in front of him (Papas)
• Onus is on Stanley
• Mistake must be material i.e. a mistake as to
  identity as opposed to attributes (Papas)
• Stanley agreed to reduce price just for
  Christian b/c he was a favourite student
• On the other hand, despite knowing about his
  failing memory Stanley failed to make any checks
  of Christians identity
• If established, contract is void
• Title cannot pass under a void contract, so
  Stanley would be able to recover the Monaro from
  the innocent third party (law student)

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Hypothetical Stanley Somber

• Monaro contract (cont.)
• Misrepresentation
• (1) False statement of fact Yes
• Representation by Trevor that he was Christian
  (positive statement)
• Fraudulent, as Trevor could not have had an
  honest belief in its truth in the sense in which
  it was intended (John McGrath)
• (2) Inducement
• Representation need not be sole inducing factor
  (Gould)
• Here, given the price reduction, Trevors
  representation that he was Christian probably a
  major inducing factor
• Note that failure to check accuracy of
  representation is not fatal (Gould)
• (3) Remedy
• Common law rescission
• Equitable rescission unlikely to be available
  because the law student (innocent third party)
  may be prejudiced
• Restitutio requirement
• Yes (assuming car has not been damaged, etc)

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Hypothetical Stanley Somber

• Retirement unit contract
• Unconscionable dealing
• Special disability
• Stanley is elderly (70)
• Stanley has difficulty remembering things
  becoming infirm of mind (Blomley)
• Taking unfair advantage
• Did Maxwell have the requisite degree of
  knowledge?
• Maxwell was at least aware that Stanley was
  elderly
• Circumstances sufficient to raise the
  possibility of a special disability in the mind
  of any reasonable person (Amadio, Mason J).
• Did Maxwell take unfair advantage?
• Maxwell was aware that Stanley only wished to
  fact find
• Maxwell obtained Stanleys signature on a
  contract that involved both purchasing a unit and
  paying rent
• Maxwell denied Stanley the opportunity of
  obtaining independent advice (Amadio Bridgewater)

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Hypothetical Stanley Somber

• Retirement unit contract (cont.)
• Fair, just and reasonable
• Maxwell obtained Stanleys signature on a
  contract that involved both purchasing a unit and
  paying rent
• Causation
• Facts suggest that Stanley signed only because of
  Maxwells persuasive, overpowering manner
• Remedy
• Equitable rescission (provided Stanley does not
  delay in seeking rescission, third party rights
  are not prejudiced, etc)

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Third Party Unconscionability (Garcia Principle)
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Garcia Principle

• Elements (Garcia, extended by Kranz)
• Relationship of trust and confidence between
  debtor and guarantor
• Guarantor is a volunteer
• Guarantor did not understand the transaction
• Creditor knew / ought to have known of
  relationship
• Creditor has failed to
• Ensure guarantor obtains independent advice
  (where there is undue influence) or
• Adequately explain guarantee to guarantor

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(1) R/ship of Trust and Confidence

• Garcia expressed principle in terms of a
  husband-wife relationship, but the joint judgment
  did not rule out its extension to other
  relationships
• The rationale of Yerkey v Jones is not based on
  the subservience or inferior economic position of
  women. Nor is it based on their vulnerability to
  exploitation because of emotional involvement. It
  is based on trust and confidence between marriage
  partners. (Gaudron, McHugh, Gummow and Hayne JJ,
  619)
• In Kranz, Vic CA viewed the principle as
  applicable to any relationship of trust and
  confidence between the guarantor and the debtor
• Similarly, Qld CA in Alirezai did not regard the
  principle as being restricted to marriage and
  marriage-like r/ships

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(1) R/ship of Trust and Confidence

• Examples
• Long term relationships short of marriage
  (Garcia, joint judgment)
• Same sex relationships (Garcia, joint judgment)
• Brothers-in-law (Kranz)
• Close friends with same cultural and religious
  backgrounds (Alirezai)
• Disabled person and his/her carer (Alirezai,
  McMurdo JA)
• Parent and child (Alirezai, McMurdo JA)

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(2) Volunteer

• Guarantor needs to be a volunteer, in the sense
  that he/she obtains no financial benefit from the
  transaction being guaranteed.
• Fact that the guarantor may indirectly benefit
  does not necessarily preclude operation of the
  Garcia principle
• Eg, a wife guaranteeing loans to her husbands
  company (Garcia)

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Statutory Duress (Cont.)

• Harassment
• involves applying repeated pressure to a
  consumer who is under no pre-existing obligation
  to acquire goods or services (ACCC v Lux)
• Coercion
• connotation of a force or compulsion or threats
  of force or compulsion negating choice of freedom
  to act (ACCC v Lux)

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(3) Lack of Understanding

• The guarantor must lack understanding of the
  purport and effect of the transaction.
• Examples
• Mrs Garcia did not realise that guarantee was
  secured by mortgage over her home (Garcia)
• Kranz did not realise that the guarantee extended
  to his personal property (Kranz)
• Alirezai did not know of Sarlaks financial
  circumstances and thus did not appreciate the
  magnitude of the risk he was assuming (Alirezai)

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(4) Knowledge of R/ship

• Creditor (bank) must know, or reasonably ought to
  have known, of r/ship of trust and confidence
  between the debtor and guarantor
• Examples
• Kranz failed because the limited extent of the
  information available to the bank meant that it
  did not know, and could not reasonably have been
  expected to know, of the relationship between
  Kranz and Tom
• Alirezai failed because ANZ did not know, nor
  ought to have known, that Alirezai and Sarlak
  were in a relationship of trust and confidence
  (majority, Jerrard JA dissenting)

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(5) Conduct Required of Creditor

• Where there is actual undue influence over the
  guarantor by the debtor, nothing but independent
  advice or relief from the ascendancy of the
  debtor over the guarantors judgment and will
  would suffice to avoid application of the Garcia
  principle (Yerkey, Dixon J approved Garcia)
• The bank need not have notice of the undue
  influence for this requirement to apply
• Otherwise, the creditor can only avoid
  application of the Garcia principle if it takes
  adequate steps to inform the guarantor about the
  obligations and effect of the guarantee or if it
  reasonably believes that the guarantee had
  been explained to him/her by a competent and
  disinterested stranger (Garcia)
• May require disclosure of financial position of
  debtor (Alirezai)