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(iii) Salvage Agreements

Where a ship is in danger of sinking and urgently needs help, the rescuer is in a strong position to exploit the situation. If the salvage agreement which is entered into is manifestly unfair and unjust the court will set it aside.[1] For example, in The Port Caledonia and The Anna221 a rescuer refused to provide a rope to assist with the rescue unless he was paid ?1,000. The agreement to pay this sum was set aside on the ground that it was manifestly unfair and unjust.

(iv) Gross Inequality of Bargaining Power

In addition to these specific types of disability or disadvantage, the courts are sometimes prepared to identify a special disadvantage where on the exceptional facts of the case there is a gross inequality of bargaining power between the parties. Where the difference in the relative bargaining power of the parties is such that the defendant is at a great advantage and the defendant’s conduct is characterized as unconscionable, the transaction is liable to be set aside. For example, where a husband and wife divorce and are suffering from emotional strain, if the husband retains the matrimonial home he is in a position of particular advantage, so if the wife agrees to transfer her interest in the house to her husband for little or no consideration, the transaction is liable to be set aside if she is not encouraged to obtain independent legal advice.222

This is further illustrated by The Commercial Bank of Australia v Amadio,223 where the defendants were induced to provide a guarantee so that the bank would be prepared to increase the approved overdraft limit of their son’s company. This type of transaction might be set aside on the basis of the son’s undue influence, if the son acted as the bank’s agent or the bank had notice of the son’s conduct. However, in the Amadio case the guarantee was set aside specifically because of the bank’s unconscionable conduct. Although the High Court of Australia recognized that the bank’s duty to make disclosure to its intending surety was very limited, it found that, on the exceptional facts of this case, there was a gross inequality of bargaining power between the bank and the parents, so that the parents stood in a position of special disadvantage vis-a-vis the bank. This gross inequality of bargaining power arose from a number of different factors, including the defendants’ reliance on their son, their age (71 and 76 respectively), their limited command of written English, and their relative inexperience of business in which the son was engaged. The bank’s conduct was regarded as unconscionable primarily because the bank manager, who had visited the defendants to obtain their signatures for the guarantee, knew of the circumstances which amounted to a special disadvantage, particularly that the defendants clearly did not understand the nature of the document which they were signing. Also, because the bank manager knew that the transaction was improvident from the viewpoint of the defendants it was ‘inconceivable that the possibility did not occur to [him] that the [parents’] entry into the transaction was due to their inability to make a judgment as to what was in their best interests’.224 But another feature which enabled the court to conclude that the bank’s conduct was unconscionable was the fact that the relationship between the bank and the son was more than an ordinary business relationship. This was because the son’s company was a major client of the bank and, crucially, the bank’s wholly-owned subsidiary. So it was in the bank’s best interests that the company was able to continue trading.

It is even possible that gross inequality of bargaining power may arise in a purely commercial context, as was recognized in Multiservice Bookbinding Ltd v Marden,225 where Browne-Wilkinson J accepted that there might be gross inequality of bargaining power between a borrower and a lender, so that, if the borrowing transaction was unfair and unconscionable, it could be set aside. The transaction was not set aside because the claimant borrower in that case had obtained independent legal advice, there was no evidence of sharp practice and, crucially, the claimant was only seeking the loan in order to expand, so that if it did not like the lender’s terms it could have refused to enter the transaction without the risk of becoming insolvent. Where the solvency of the borrower is dependent upon the obtaining of the loan, it might be possible to identify gross inequality of bargaining power, but unconscionability will still need to be identified and this will be difficult to establish. In Strydom v Vendside Ltd226 the trial judge had held that the claimant had established a special disadvantage because there was inequality of bargaining power between the claimant, a former miner looking for advice and trusting a trade union to look after his interests, and the defendant trade union which was offering to pursue the miner’s claims on its own terms and for its own interests. On appeal Blair J held227 that this decision turned on the special facts of the case, because there was normally no inequality of bargaining power between a union and its members.

The operation of the doctrine of unconscionable conduct in the commercial sphere has proved to be particularly significant in Australia and Canada. Even there the inequality or imbalance must be ‘overwhelming’228 such that there is a gross inequality of bargaining power between the parties.2 9 This will be difficult to establish. There must be ‘something more than commercial vulnerability to elevate disadvantage into special disadvantage’.2 For example, in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd,231 tenants, who had no legal entitlement to the renewal of their lease, needed to renew it in order to sell their business for a substantial price. The tenants had claims against the landlord, who insisted that, as a condition of renewing the lease, they should discontinue their legal action. The tenants took legal advice and agreed to the condition. This was held not to be an unconscionable bargain because the tenants were not at a special disadvantage. They suffered no lack of ability to judge or protect their financial interests and, crucially, they had the benefit of legal advice.

There may, however, be other features which enable the court to identify a special disability or disadvantage in a commercial context. In Canada, for example, special disadvantage has been held to include ignorance of business.232 In England, in Jones v Morgan233 the trial judge had recognized that the weaker party was at a special disadvantage because he was ‘naive, trusting and unbusiness-like and not a match for an astute business man’ like the stronger party. Although the judgment was reversed on appeal, this was because the defendant’s conduct was not considered to be unconscionable, rather than because the special disadvantage could not be identified.2 4 Significantly the UNIDROIT Principles of International Commercial Contracts235 states that relevant disabilities include dependence, economic distress or urgent needs, improvidence, ignorance, inexperience, and lack of bargaining skill.

(E) STATUTORY REGIMES

The most important statutory provision relating to unconscionable transactions is the Consumer Credit Act 1974 which gives the court extensive powers to deal with credit agreements where the relationship between the creditor and the debtor arising from the agreement is unfair to the debtor because of the terms of the agreement, the way in which the creditor has enforced his rights under the agreement or anything else which the creditor has done or failed to do.236 The powers of the court include the power to require the creditor to repay the whole or part of any sum paid under the agreement.237 Significantly, if the debtor alleges that the relationship between the debtor and creditor is unfair, the burden is placed on the creditor to prove otherwise.238

  • [1] See Lord Denning MR in Lloyds Bank Ltd v Bundy [1975] QB 326, 339. 221 [1903] P 184.
 
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