Contracts voidable on the grounds of unconscionable conduct

NB REFERENCES TO "HPH" OR JUST TO A PAGE NUMBER ARE TO HEFFEY, PATERSON AND HOCKER CONTRACT COMMENTARY AND MATERIALS 8TH ED 1998 (LBC INFORMATION SERVICES)

We now come to the remaining "excuse" areas of the law of contract. Just like misrepresentation, these doctrines may result in the contract being set aside, that is, the contract is voidable if any of these doctrines are successfully argued. Like misrepresentation, they relate to defective negotiations - something happened during the negotiating period which makes it unconscionable for one party to insist on the contract.

The doctrines are closely related to each other. In fact it is sometimes difficult to distinguish between them in a particular fact situation. They each involve the idea that one party has taken advantage of a position of ascendancy over the other. Duress involves either physical threats or unacceptable commercial pressure so as to procure agreement. Undue influence involves the use of a position of power or influence over another, such as when a university lecturer, just prior to the exams, buys a car from one of his or her students at a very cheap price. Unconscionable bargaining involves one party taking advantage of the other party’s particular vulnerability or lack of understanding such that it would be unconscionable to take the benefit of the contract.

Duress

We start with duress. This is the crudest form of pressure. The most blatant form is physical duress. This has been recognised for a very long time as being a basis for setting aside not only contracts but also gifts. In more recent times - in fact only in the last 20 years or so - the courts have recognised less obvious duress, namely commercial pressure - called economic duress. This latter form of duress raises a difficult problem of demarcation: how do you tell the difference between unacceptable commercial pressure which attracts the intervention of the law and the ordinary rough and tumble of the market place where things are sometimes a bit tough but where there is no help provided by the law?

The effect of a successful plea of duress is to render the contract voidable not void. This may seem surprising (because the victim's agreement to the contract is really no agreement) but it is quite consistent with the objective theory, re-emphasised by the High Court in Taylor v Johnson. If we were to say that duress rendered the contract void we might be wandering into subjective territory, that is, investigating what went on in the head of the victim of the duress. By contrast, the objective theory starts from the position that this person apparently made a contract but then contemplates the possibility of setting the contract aside if the the victim makes out a case of duress. There is surprisingly little authority on this issue but the Privy Council in Barton v Armstrong, a physical duress case, made it clear that the contract in that case was voidable, not void. This is also apparent from the economic duress cases.

Cases on physical duress are extremely rare, at least in modern times. Naturally, about the only case we have is an Australian one in which Mr Barton was threatened with murder by Mr Armstrong before Barton signed the contract (actually a deed) in question. I suppose that people who do business in this sort of way do not usually resort to the courts because they have other enforcement mechanisms. Hence the rarity of these cases. But we can be proud that the leading modern case on physical duress in the common law world is Australian.

The major issue in this case was about causation. Armstrong argued, in effect, "Yes I threatened murder but, in the circumstances, it made no difference because Barton would have signed anyway." Surprisingly, the trial judge bought this argument. The case went all the way to the Privy Council and it is the extract from the case at that level which appears in the casebook. The main question was about the onus of proof in relation to the causation issue. Did Barton (the victim) have to prove that he was coerced by the threat? Or did Armstrong (the threatener) have to prove that the threat had no effect? The Privy Council decided that the onus was on Armstrong, the party who had made the threat, to show that it had no effect. This, of course, Armstrong could not do because it involved trying to prove a negative. One suspects that the Privy Council was motivated to make it as hard as possible for the person who made the threats. Thus, once it is proved that an illegitimate threat was made, there is a presumption that the threat had some effect unless the party who made the threat can prove otherwise. To rebut this presumption, as we have seen, is virtually impossible.

It is made clear that the threat does not have to be the reason for entering the contract; it is sufficient if it is a reason. This is consistent with what we saw in the law of misrepresentation.

Another form of physical duress is what is called duress of goods, that is, where someone will not release goods in order to persuade the other party to sign a document or pay some money, etc. The threat not to release the goods must be an illegitimate threat. There are circumstances where it is perfectly legal to detain someone’s goods to bring pressure on them to pay. The most common example is the unpaid seller’s or repairer’s lien. For example, if you take your car to the garage to have it repaired, the repairer is entitled to hold on to your car until you pay the bill. So we must distinguish between illegitimate duress of goods and legitimate retention of goods.

We have a modern case on duress of goods. It settled a silly controversy which goes back into the distant past. It was said that duress of goods to extract money from someone could be argued to get the money back. But there was authority which said that if duress of goods was used, not to extract money, but to extract an agreement from someone, then the duress of goods could not be used to undo the agreement. This distinction had no logic to it and it was finally discarded in the next case.

In this case Helicopter Charter wanted to have one of its helicopters repainted and entered into a contract with Hawker Pacific to do the job. A disagreement between the parties arose because HC was not happy about the quality of the job done by HP. Further work was done but it was still not very good. The helicopter was taken away but then delivered back again to HP to rectify the defective work. When HC’s representative came to pick up the helicopter the second time, HP’s representative asked him to sign a document. This was a release type of document which attempted to ensure that HC would not make any further complaints about the quality of the job. HC’s representative signed the document. Normally, of course, this would be a contract of settlement of the dispute which had emerged, supported by a compromise or forbearance type of consideration. However, HC argued that the document which it signed was voidable on the basis of duress. This was because it was pretty clear that HC would not have got their helicopter back if they had not signed it, or at least there would have been unacceptable delay. The helicopter was needed urgently for charter work that day. The HP people knew this. However, they did not actually make a threat to detain the helicopter.

Priestley JA in the NSW Court of Appeal set out the law on duress of goods. One point worth noting is that in his statement of the facts on p 1177 in the 1st para of his extracted judgement, Priestley said at the end of the para that HC’s conduct subsequent to the day on which it signed the document in issue did not amount to affirmation of the agreement. This is to underscore the fact that duress renders the agreement voidable and that it is possible to lose the right to rescind by, for example, affirmation. The affirmation point was argued on appeal and is discussed by Priestley from 3rd para on p 1180 to 1181. He concluded that there was no conduct of HC after signing the document which would be taken to be affirmation of the contract.

Priestley then looked at the law, in particular an Australian case called Smith v William Charlick Ltd, an early case of economic duress. The passage starting on the bottom of p 1177 deals only with threats to extract money. The point which comes out of this passage is that the form of the threat can be physical threats to the person, to goods or the threat can be non-physical, such as a threat to withdraw a right. Further, the threat may be made not to the immediate party but also to some person close to that person.

In the middle para on p 1124 Priestley deals with the silly distinction, already mentioned, and says that it should make no difference whether the threat is used to try to extract money or whether the threat is used to extract agreement to a contract. Clarke JA on p 1181 also deals with this issue, saying how absurd the old distinction is and that it should no longer be followed.

Most of what is said in the extract we have is confirmation of the findings of the trial judge. It was argued by HP that HC’s claim to have been coerced could not stand up because they never protested, either at the time of signing or subsequently. Protest is a relevant factor in coercion cases. If someone does protest then it is easier to conclude that they were subjected to pressure. But, it is well established that lack of protest is not of itself significant. A failure to protest does not necessarily mean that the alleged victim of the threat was not coerced by it.

We now come to economic duress which, as I have already indicated, has only in relatively recent times emerged as a doctrine. Its origins can be traced back to what Isaacs J had to say in Smith v William Charlick Ltd about compulsion, extortion, coercion, exaction, etc in the passage on p 1177-1178 which was discussed by Priestley JA in the Hawker Pacific case. Then in the case of TA Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd HPH 167 (which we studied when we looked a the doctrine of consideration and the performance of existing duties) the idea of economic duress was discussed. These two cases then became the inspiration for a new doctrine of economic duress which emerged in the United Kingdom in the late ‘70s.

The idea behind economic duress is to recognise that very great pressure can be brought to bear without actually holding a gun at someone’s head. In certain circumstances, the courts are prepared to say that some forms of commercial pressure are unacceptable with the consequence that any advantage secured by the use of such pressure can be set aside. This advantage may be an agreement which has been secured by the unacceptable pressure or it may be just payment of money has been secured by the pressure. The great problem, as I have already indicated, is that it is sometimes very difficult to distinguish between unacceptable commercial pressure and acceptable commercial pressure.

The relationship between the idea of economic duress and the doctrine of consideration is that the existing duty rule sometimes served the function of protecting against extortionate demands. If someone asked to be paid more under a contract (with an express or more usually an implied threat not to complete the job) then the existing duty rule said that the promise to pay more was not binding. But the rule is now possibly in doubt following the decision in Williams v Roffey Bros & Nicholls (Contractors) Ltd (HPH 168) and the decision of Santow J in Musumeci v Winadell Pty Ltd (HPH 171). Further, the existing duty rule was not focussed on illegitimate pressure. It is indiscriminate in its operation. It rules out a promise to pay more money (or whatever) even when the promise was not brought about by an express or implied threat but is quite reasonable and legitimate. One of the reasons for getting rid of the existing duty rule, put forward by the judges in these cases, is that it is no longer needed to protect against extortionate demands; the doctrine of economic duress can do this more directly instead.

One of the cases which saw the emergence of the doctrine of economic duress was

This case involved a contract for the building of a tanker. The shipbuilder found that, because of a drop in the value of the US$ and because the contract had not made provision for currency fluctuations, they were facing a shortfall in what they were hoping to make out of the contract. So they demanded an extra US$3m approximately. The buyer of the tanker reluctantly agreed to pay but under protest. The buyer already had a charter for the tanker and it was essential that it should be delivered on time. When the tanker was eventually delivered, the buyer for some reason said nothing for some 8 months and then made a demand for the excess payment.

One of the interesting things which emerged in this case is that usually the claim for the excess would be a simple matter of relying on the existing duty rule (which back in 1979 was still alive and well). That is, there would simply be no consideration for the payment of the extra money and so it could be claimed back. But in this particular case, there was a consideration for the extra payment. This was fortuitous and was found in something called a "return letter of credit". The contract provided for a letter of credit (a method of paying) in favour of the buyer. In certain circumstances the shipbuilder might have to make payments to the buyer and a letter of credit was established for this purpose. When the buyer was asked to pay more for the tanker, the buyer asked the shipbuilder to increase the return letter of credit which was duly done. The judge found that this was sufficient to constitute a consideration for the promise to pay an extra US$3m or so. The fact that the two considerations did not in any way match in terms of value is, of course, of no consequence.

The upshot of the consideration point (discussed 1185) was that the promise to pay the extra amount could not be knocked out on the basis of there being no consideration for it. So, the next question was whether the contract to pay more was voidable on the basis of economic duress. The judge starts to discuss this on p 1185. He came to the conclusion, drawing on Isaacs J in Smith v William Charlick Ltd, that there was economic duress in this case, namely, the effective threat to break the contract. This rendered the "new" contract — the contract of variation of the purchase price — voidable.

Now, the final phase of the case takes another turn. Remember that the buyer of the tanker delayed for some 8 months before demanding the excess money back. In the end this proved to be fatal to the buyer’s claim. This is because its conduct was taken to be affirmation of the mini contract constituted by the promise to pay extra in exchange for the increase in the return letter of credit. The buyer had the right to rescind because of economic duress but lost it because of its delay.

What we can draw from this case is that threatening to break a contract will generally constitute unacceptable commercial pressure. Most of the cases of operative economic duress are about threats to break contracts.

Nevertheless, it cannot be said that threatening to break a contract is invariably going to constitute operative economic duress. There is one case (of which I am aware) where such a threat was not regarded as unacceptable in the circumstances. This is another case which we looked at in 1st semester.

This case shows how difficult it is to draw the line between acceptable and unacceptable commercial pressure. I repeat that normally threatening to breach a contract will amount to actionable economic duress. But not so in this case. One cannot provide some rule of law on this question. It is a factual question. In the particular circumstances of this case it was not unacceptable to ask for a new agreement when the original agreement was so evidently flawed and probably the other party must have realised that it was flawed.

We now come to the last case we are going to look at under the heading of economic duress.

This is a case which involved industrial action by the International Transport Workers Federation. They black banned a ship in order to induce the owners to accede to various demands being made by the union. One of the demands was for the employer to pay some money into the union’s welfare fund. The employer did pay the money to get the ban lifted but then brought an action later to recover the money, arguing that the payment was procured by duress. This case, therefore, did not involve a contract as such (unless possibly it could be argued to be a compromise type of contract). The duress cases over the years have applied equally to payments of money as they have to contracts.

You will see in the judgment of Lord Scarman on p 1187 the elements which are necessary to satisfy the duress argument. It must be said, as I have already mentioned, that the first element is controversial, that is, to say that it is necessary to show that a person’s will was overborne - that there was "compulsion of the will". It has been argued that this is not a necessary element. The criticism in part is based on the idea that the person’s will - his or her state of mind - is irrelevant. This is because, of course, the objective test is the correct approach. The idea of the overborne will has also been criticised on the basis that it really does not focus on the right issue which is the legitimacy or otherwise of the pressure which is brought to bear.

The courts may look to the evidence of the victim’s reaction to the pressure, such as protesting at the time, or making it clear that he or she reserves his or her rights and so forth. But none of this is conclusive. If someone makes no protest that does not mean that they cannot establish that there was unacceptable pressure. As Lord Scarman said on 1188 2nd para "The victim’s silence will not assist the bully . . . "

We get some guidance - though by no means a comprehensive statement - about what is acceptable pressure and what is not. See p 1188 4th last para "In determining what is legitimate..." The court will look to:

in order to determine whether the pressure is acceptable or unacceptable. For example if the pressure which is used is obviously unacceptable (such as holding a gun at someone’s head) then that is the end of the inquiry. But if there is doubt about the means used then one has to look to the second element, namely, what it is that is being demanded.

In this case the pressure was possibly governed by industrial relations legislation which did allow unions to bring certain types of pressure to bear. If black banning the ship was allowed by the legislation then the claim for return of the money would have failed. In the end, the conclusion of the majority (not Lord Scarman who was in the minority on this issue) was that the legislation did not excuse the black ban so that the claim for the return of the money was successful.

Undue influence

We now move to more subtle forms of pressure which may be brought to bear in the negotiating period and which can generate the remedy of rescission. Sometimes, on the face of it, in these sorts of cases the ascendant party has not really done anything wrong. These sorts of cases may be ones where the so-called "victim" has willingly entered into the contract. This is to be contrasted with cases under the heading of duress where the victim is unwilling, but has no real choice. Yet the law takes a protective stance and dictates that the ascendant party must not be allowed to benefit from a contract or gift (these cases also apply to gifts) when the relationship between the parties is unbalanced. The onus is then on the ascendant party who may be able to persuade a court that, even though the relationship was unbalanced, nevertheless the contract was perfectly proper and above board and should not be set aside.

Undue influence cases fall into two categories:

There is a problem of categorisation of undue influence cases. There is also a problem sometimes of whether a particular case falls into the category of undue influence or some other category such as unconscionable bargaining or possibly the more subtle forms of duress. You will see a suggestion made by Duggan J on p 1191 of the casebook that perhaps the various categories of doctrines could be brought together under one label.

There is a list of relationships where there is a presumption that undue influence has been exercised by the ascendant party. These relationships are ones where the dependent party has reposed confidence in the ascendant party and would expect the ascendant party to act in the dependent party’s interests. This is an essential characteristic of what is called a fiduciary relationship, that is, a relationship in which the fiduciary - the ascendant party - must act with the utmost good faith and must act, not in his or her own interests, but in the other party’s interests. The list includes (in order of appearance ascendant and dependent party):

The list does not include husband and wife nor does it include principal and agent, banker and customer or teacher and student. It may be possible to show that a particular relationship is in fact one of influence. In some relationships this will not be a very difficult task. For example, it is relatively easy to establish that a particular relationship of husband and wife is one of influence. But the courts will not start out making a presumption in relationships which are not in the list.

Apart from showing that there is deemed to be undue influence (because the relationship is in the list), it is always possible to show that there is in fact undue influence in a particular relationship, that is, that a person should not be bound by a contract or gift if it was procured in circumstances where there was unfair advantage taken by one party over the other. An example is

In this case Mr Buttress (and his wife before she died) had known Mrs Johnson and her husband for some 20 years. While Mrs Buttress was dying Mrs Johnson provided comfort and assistance to both Mrs Buttress and to Mr Buttress. After Mrs Buttress died, Mr Buttress lived an eccentric lifestyle, living in a shack which he built even though he had a cottage. The cottage had a tenant in it. Mr Buttress said that he wanted to give his cottage to Mrs Johnson in gratitude for her kindness to him and his wife. The documents were prepared by Mrs Johnson’s solicitor who did make enquiries of Buttress whether he really wanted to give his cottage away. Eventually Mr Buttress died and his executor challenged this gift, arguing that it should be set aside.

You can see from the facts of this case that the argument of undue influence does not necessarily involve cynical or nasty people. Clearly in this case there was far less reason to set aside the transaction than in other cases where a relationship of ascendancy exists. The case was finely balanced.

Dixon J made the important point on very top of page 1193 that this case turned entirely on who has to bear the burden of proof. He dealt with this at the end of the 1st para. Having pointed out that there was no overwhelming evidence that the deal was either procured improperly or was entered into by someone who clearly knew what they were doing, he said that if the burden of proof was on the donee, Mrs Johnson, to show that Mr Buttress gave her the cottage as a free and independent person free of any influence, then she would not be able to discharge that burden on the evidence that had been presented at trial. If, on the other hand, the onus was on the executor of Mr Buttress’s estate to show that Mrs Johnson had exercised improper influence over him, then he would not be able to discharge that burden on the evidence that had been presented.

Dixon J then set out the law in this area, referring to the established list of relationships where undue influence is presumed and where the burden is therefore on the ascendant party to justify the receipt of the gift by showing that it was the act of an independent and free person. Obviously this case did not fall into that category. But it is still possible to argue undue influence if it can be shown that in fact the relationship between the parties was such that one person had a position of ascendancy over the other. This case then turned on whether Mrs Johnson was in a position of ascendancy over Mr Buttress. The trial judge had concluded that she was and Dixon J came to the same conclusion on p 1194 at the end of the 3rd last para. Mr Buttress’s "illiteracy, his ignorance of affairs, and his strangeness in disposition and manner" meant that he was vulnerable. This meant that the onus was on Mrs Johnson to show that the gift was made by a person exercising his free will unhindered by another’s influence. As we have already seen this burden could not be discharged with the result that the gift was set aside.

This was a gift case but Dixon J did say something about where a contract is procured by undue influence (see page 1194 3rd para). One of the relevant factors in determining whether it was a proper or improper transaction is the consideration. Here, when dealing with these equitable remedies, the value of consideration is relevant. The peppercorn principle is set aside when the enquiry is concerned with whether or not the transaction was the product of unconscionable dealing or negotiation. So, if someone sold their house for a very low price this would be a relevant factor in deciding whether there was a relationship of undue influence. The English case referred to in a note on p 1195 National Westminster Bank Plc v Morgan [1985] 1 AC 686 has held that it must be shown that the transaction was "manifestly disadvantageous" before it can be shown that there was undue influence. This has been criticised on the basis that it should not be a necessary factor but it should only be a relevant factor. For example, if a widow was persuaded to sell her family home to an estate agent, and the agent paid a fair market price, it should still be possible to argue undue influence if she really did not wish to sell.

We have seen that, once it is established that there is a relationship of undue influence, then the burden is on the party who has received the gift or has benefited from the contract to show that the transaction was the product of a free and unpressured mind. The way to discharge this burden varies from case to case but it is necessary to produce evidence of independence of mind. One way to do this is to show that the person who made the gift or the contract received independent legal advice. Remember that Mr Buttress received advice from Mrs Johnson’s solicitor.

An example of a case where this burden was successfully discharged was

This was a case where a solicitor did the legal work for a proposed land development project on the outskirts of Melbourne. When the solicitor submitted his bill, the clients suggested that he might think about reducing his bill in exchange for a share in the venture. This was eventually agreed to. Later, the defendant repudiated the agreement, claiming that it did not have to pay the solicitor a share of the profits. The argument was that the agreement under which the solicitor reduced the bill in exchange for a share of the venture was voidable. The agreement was one between solicitor and client and there was therefore a presumption of undue influence. It was argued that the solicitor should have advised the clients to seek independent legal advice before they committed themselves to the agreement. This the solicitor had not done.

The case really boiled down to the question whether it was mandatory for the solicitor to advise the client to seek independent legal advice. The answer was that it was not mandatory. In this case the presumption of undue influence was rebutted because the defendant and its representatives were sophisticated commercial players. The dealings were at arms length. The point is made in the last para of page 1196 that in many of the cases involving solicitor and client the presumption is successfully rebutted by the solicitor showing that the client was advised to seek, and did seek, independent legal advice. But this does not mean that this is the only way of rebutting the presumption.

On pages 1199-1200 the casebook editors discuss the way in which rescission works in cases of undue influence. A court has some flexibility in fashioning an order to achieve rescission of the contract. At the same time, it is possible, in some circumstances, to lose the right to rescind when, for example, third party rights have come into the picture or where the party who was the "victim" of undue influence either affirms the transaction or delays for too long in asserting his or her rights.

Unconscionable bargaining

We come now to the last category under the general heading of unconscionable conduct during the negotiation period. The point has already been made that these various categories may sometimes be hard to distinguish. This last one really takes care of those situations which do not easily fit into the previous categories and yet something went wrong in the negotiation which calls for intervention. For example, where there is no pressure brought to bear, where there is no relationship of undue influence between the parties, where it is not possible to argue non est factum and yet it is obvious to one party that the other really did not understand the implications of entering into the contract in question, then it may be a case which needs to be dealt with on the basis of this last category - unconscionable bargaining.

This is an area of the law which has been the subject of recent developments in the caselaw - led by the High Court in the Amadio case which we are about to look at - and in statute law.

The law - or more accurately equity - has always been able to provide relief when someone is evidently incapable of looking after his or her own interests. For example, if someone is suffering from mental incapacity at the time of entering into a contract then the contract may be set aside. If someone was obviously drunk, similarly, a court may set aside the contract. The emphasis in these cases is on the other party who is prohibited from taking an unconscionable advantage of the party with the disability. Just like in undue influence cases, once it is established that the requisite situation of disadvantage existed, then the burden shifts to the ascendant party. In these sorts of cases the party has to show that the transaction in question was "fair, just and reasonable" - a formula which is really no different from what is required in undue influence cases. (Hence the calls from time to time to bring all these doctrines together.) The important modern case in this area is

In this case Mr and Mrs Amadio were elderly and had little understanding of written English. They had had little formal education. Mr Amadio had some business experience. Their son Vincenzo was a property developer and builder. He lived in a very luxurious style. His businesses appeared to be very successful but in fact they were in financial trouble. Vincenzo was in daily contact with the manager of his bank, Mr Virgo, where they decided which bills that came in should be paid and which could wait. This was done by selectively dishonouring cheques written by Vincenzo’s business. The bank was indirectly involved in Vincenzo’s business through a subsidiary. Vincenzo threw an enormous Christmas party (to which Mr Virgo was invited). To any outsider and to Vincenzo’s parents, Vincenzo gave the impression of enormous prosperity. Things went from bad to worse and the bank in the end required more security for Vincenzo’s overdraft. He said that his parents would provide security. He talked to his parents and asked them to provide a guarantee and mortgage over a property they owned for 6 months and up to $50,000. In fact the bank had mentioned no such limits. The culmination of all this was Mr Virgo visiting Mr and Mrs Amadio in their home with the mortgage and guarantee documents. The documents were signed on the kitchen table with very little being said and Mr Virgo not explaining their effect. Mr and Mrs Amadio did not read the documents. Mr Amadio did say something about the 6 month limit and Mr Virgo replied that there was no such limit. The mortgage was unlimited as to the amount and as to time: it covered any amount which Vincenzo would overdraw for the indefinite future.

The inevitable happened. Vincenzo’s business continued to deteriorate and in the end the bank sought to enforce the guarantee and mortgage. The issue was whether Mr and Mrs Amadio were bound the documents they had signed.

Deane J (whose judgment is representative of the majority view) set out the equitable principles by which a court will set aside transactions starting with the old expectant heir cases. (Impecunious expectant heirs who sold their inheritance were treated with particular tenderness by the courts.) Deane J (p 1213 5th para) compared undue influence and duress, on the one hand, which look to the quality of consent of the weaker party, with the unconscionable dealing cases, on the other hand, which are more concerned the unconscientious advantage which the stronger party takes of the weaker party’s vulnerability. But, in fact, all these cases are concerned with both factors - the weaker party’s vulnerability or susceptibility and the stronger party’s conduct in benefiting from his or her position of strength.

Note that, just as with undue influence, adequacy of consideration is a relevant factor in determining whether the weaker party was at a serious disadvantage (p 1213 last para). But, again, it is not an essential factor. In the case of guarantees (of which Amadio itself is an example) there is a consideration which is technically regarded as adequate by the law, but the essence of a guarantee of third party’s liabilities is that it is virtually a gift despite the technical existence of consideration.

Deane J applied the principles to the facts of this case on p 1214. He found that the Amadios were at a serious disadvantage (p 1214 2nd last para). "Put more precisely..."

He then asked whether the bank through its agent Mr Virgo was sufficiently aware of the Amadios’ difficulties so that it would be unconscionable for the bank to benefit from the guarantee and mortgage. Mr Virgo said that he had assumed that Vincenzo had sorted it all out with his parents and that they were aware of the implications because Vincenzo had advised them. Deane J, whilst stressing that Mr Virgo had not acted in any morally reprehensible manner, had not taken adequate precautions. He had "simply closed his eyes to the vulnerability of Mr and Mrs Amadio and the disability which adversely affected them" ( p 1216 top para). It should have been obvious to Mr Virgo that the Amadios needed assistance and advice, particularly when Mr Amadio’s remark about his belief that the guarantee and mortgage were for only 6 months indicated clearly that he (Mr Amadio) did not understand what he was letting himself in for.

Having established that the Amadios were at a serious disadvantage, known to the bank, the onus then shifted to the bank to show that the transaction was "fair, just and reasonable". This is considered on p 1216 half way down. Mr and Mrs Amadio did have an understanding of what they were signing but they completely misunderstood its significance and potentially ruinous effect. If they had been told of the perilous state of Vincenzo’s business and if the mortgage was limited to $50,000 then it might have been fair, just and reasonable. But, as it was, Deane J concluded that the transaction was not fair, just and reasonable.

He then turned to the appropriate remedy. He canvasses a very interesting possibility on p 1217 5th para. He suggested that maybe the appropriate relief was to limit the guarantee and mortgage to $50,000 to accord with the Amadios’ expectations. (Of course now Deane J's suggestion has been taken up and applied in the Vadasz case, discussed earlier under misrepresentation.) This sort of relief is available under the Trade Practices Act 1974 (Cth) s 87 but, as I pointed out when we looked at that section, that section provides flexibility previously unavailable in the common law and equity. So, the idea floated by Deane J was certainly an interesting one. But, in the end, he decided not to go down that path and held that the whole guarantee and mortgage should be set aside with the result that it could not be enforced by the bank.

Wilson and Mason JJ came to the same conclusion. Gibbs CJ also came to the same conclusion but based on a narrower ground to do with the law of guarantee, namely, that a bank is obliged to disclose any unusual features to the guarantor relating to the risk which is being covered. Here the bank had not revealed that V was in such trouble nor that they had participated in conveying a misleading impression of V’s viability. Dawson J dissented.

As already noted the suggestion by Deane J of a partial remedy, that is, enforcing the guarantee in part, was taken up and applied in the Vadasz case, a case also involving a guarantee. It will be recalled that the High Court enforced the guarantee so as to accord with Mr Vadasz's understanding of what he was signing (he had been misled) rather in accord with the strict terms of the guarantee.

A common situation, which raises some interesting issues from a feminist point of view, is that the husband is the debtor and whose business is usually in trouble. The bank wants greater security and often looks to the family home. Typically, the husband asks the wife to sign the guarantee and mortgage documents. It may be that the husband has been guilty of misrepresentation or has put his wife under pressure or has simply been insensitive to her lack of understanding of the implications of the transaction which she is being asked to execute. Later, she claims that the significance of the transaction was not explained to her and she seeks to be relieved from the consequences of the transaction. It certainly is possible for the wife to succeed in a case like this. The High Court had held that this was possible back in 1940 in a case called Yerkey v Jones (although on the facts they did not set aside the transaction).

You can see some of the feminist and other literature which has been generated as a result of this area of the law in the judgment of Kirby P on p 1227 of the casebook.

(a) in fact the surety did not understand the purport and effect of the transaction;

(b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed);

(c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet

(d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.

As is apparent from what was said in Yerkey v Jones the creditor may readily avoid the possibility that the surety will later claim not to have understood the purport and effect of the transaction that is proposed. If the creditor itself explains the transaction sufficiently, or knows that the surety has received "competent, independent and disinterested" advice from a third party, it would not be unconscionable for the creditor to enforce it against the surety even though the surety is a volunteer and it later emerges that the surety claims to have been mistaken.

What then of the present case? The trial judge found that the appellant did not understand the purport or effect of the transaction. She knew it was a guarantee but she thought it was a guarantee of limited overdraft accommodation to be applied only in the purchase of gold. Nor did she understand that her obligations under the guarantee were secured by the mortgage which she had given over her home. It being found that the bank took no step to explain the transaction to her and knew of no independent advice to her about it (there having been no such independent advice) the conclusion that the appellant was entitled to succeed in her claim to set the transaction aside was inevitable if she was a volunteer.

The trial judge found that the appellant was not "directly involved" in Citizens Gold. And he made this finding notwithstanding that the surety was shown in records held by the Australian Securities Commission to be both a director of, and a shareholder in, the company. The records of Citizens Gold held at the Australian Securities Commission presented, however, a confusing picture of movements in shareholdings over the years: so confusing that the trial judge said that it could be "seen from the records that the exact beneficial holding in the various companies [including Citizens Gold] is quite obscure". Although the trial judge found that from time to time some benefit flowed to the family from the companies, he found that they were companies that were in the "complete control" of the appellant's husband. Taken as a whole, those findings demonstrate that the appellant in fact obtained no real benefit from her entering the transaction; she was a volunteer. The fact that she was a director of the company is nothing to the point if, as the trial judge's findings show, she had no financial interest in the fortunes of the company.

One important point was left open by Gaudron, McHugh, Gummow and Hayne JJ. If the basis of the principle being applied is the emotional dependence of the (female) spouse, is the same principle applicable to other emotionally dependent persons, such as male spouses or de facto spouses. Gaudron, McHugh, Gummow and Hayne JJ (at [22]) referred to this question in the following terms:

It may be that the principles applied in Yerkey v Jones will find application to other relationships more common now than was the case in 1939 - to long term and publicly declared relationships short of marriage between members of the same or of opposite sex - but that is not a question that falls for decision in this case. It may be that those principles will find application where the husband acts as surety for the wife but again that is not a problem that falls for decision here. This case concerns a husband and wife and it is to that relationship that the present decision relates, just as it is concerned only with the circumstance of the wife acting as surety for her husband. The resolution of questions arising in the context of other relationships may well require consideration of other issues. Thus to take one example, if cohabitation is taken as a criterion, what should a lender know or seek to find out about the nature of the relationship between the parties? But those issues did not arise and were not debated on the hearing of this appeal.

It remains to be seen how lower courts apply these principles and whether they will extend them to situations other than ones in which wives act as guarantors.

Apart from the developments in the case law which we have just sampled, the legislatures have been quite active in the area of unconscionable conduct. This has occurred at both Commonwealth and State and Territory levels. New South Wales alone has a special Act - The Contracts Review Act - which attempts to deal with unfair and unconscionable contracts. Sometimes the legislation will overlap with the equitable provisions which we have just examined.

Damages under s 82 are not available.

Section 51AB (formerly called s 52A) provides a statutory regime which defines the kind of conduct and circumstances which amount to unconscionable conduct and is restricted to the supply of goods or services to a consumer, as defined. Consumer is defined in subsections (5) and (6) to mean the supply of goods or services to someone for ordinary household use or consumption and not to someone who is engaged in business. So, probably the section would not apply to the facts of either Amadio or Warburton.

The types of factors which amount to unconscionable conduct are spelt out (non-exhaustively) in subsection (2) and include inequality of bargaining power, whether the corporation has inserted conditions which are not needed for the legitimate protection of its interests, whether the contract is in a form which is not easy to understand, whether unfair tactics or pressure was used by the corporation supplying the goods or services and whether the goods or services were too expensive having regard to the market.

The section lists 11 guidelines as to what may constitute unconscionable conduct (eg relative strength of the parties, whether unreasonable or difficult to understand clauses in the contract, whether pressure was brought to bear, the price, etc). The contracts covered by this section are those for $1m or below. A wide range of remedies are available, including damages, cancellation of the contract and modification of the contract. This new provision is controversial with a number of commentators saying that it will promote uncertainty and encourage litigation.

The State and Territory Fair Trading legislation mimics s 51AB but they have not got around to passing complementary legislation with respect to s 51AA and s 51AC. Of course, the legislation applies to "persons" rather than corporations.

New South Wales alone has passed unconscionability legislation (in some ways similar to s 51AB of the Trade Practices Act) in the Contracts Review Act. This was passed before the States and Territories were persuaded to pass their Fair Trading Acts which mimicked s 51AB. The Contracts Review Act has in fact been used quite a lot. The scheme of the Act is described on p 1233-4. It, like s 51AB, is also supposed not to be available in respect of ordinary business transactions (s 6). The courts have nevertheless taken a very generous view of what constitutes a non-business transaction and have provided relief in circumstances like in Amadio and Warburton under the Contracts Review Act, that is, the courts have allowed relief in respect of transactions with a distinctly business element to them. The remedies under this Act are again very flexible.

The focus of the Act is on "unjust contracts" which are defined by reference to a list of criteria. The Act does not just focus on unconscionable bargaining tactics or inequality or pressure. It is also concerned with substantive unfairness such as harsh terms or an unfair exchange.

That finishes with the doctrines which allow contracts to be avoided on the basis of the various forms of unconscionable conduct.