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"Unfair" agreements may be rejected by the court

Obtain independent legal advice to ensure that you are not entering into an unconscionable transaction/agreement.

Generally, when a signer signs a contract, they are bound by it. However, courts have created exceptions to set aside a contract if they are unconscionable (when there is unequal bargaining power between the contracting parties). The courts have created some categories of unconscionability.

1. Duress of Goods: when a person in possession of goods is in a position of stronger bargaining power because of the urgent need of the goods by the other weaker party;

2. Unconscionable Transaction: when a stronger party takes advantage of a weaker party who is in need of some special care and protection by obtaining the weaker party’s property for a grossly under valued amount;

3. Undue influence: a) when the stronger party is guilty of some fraud or wrongful act to gain some gift or advantage; or b) because of a special relationship between the parties (relationship of power/confidence/fiduciary), the stronger party has gained a gift or advantage for themselves over the weaker party;

4. Undue pressure: a party exerts pressure to obtain some gift or advantage which the weaker party would not have otherwise consented to; and

5. Salvage agreement: when the weaker party is in a vulnerable situation in need of rescue/assistance and submits to the requests of the stronger party.

In Lloyds Banks Limited v Bundy [1975 EWCA], looks at the concept of unconscionability.

Bundy only had one asset, his home. His son operated a business that was in financial trouble. He asked his father to provide a collateral so that he could get loans from Lloyds Banks. After speaking to a lawyer, the father signed an agreement providing collateral for a smaller amount of money. Later on, the son required a larger collateral amount. Workers from Lloyds Banks and Bundy’s son told Bundy that the son was in great financial trouble and required Bundy’s help by providing his home as collateral. Bundy signed the document agreeing to do this. Five months later, the bank foreclosed on the son’s business and seized Bundy’s home. The court held that this was an unconscionable agreement for the following reasons: 1) Consideration moving to the bank was grossly inadequate (Bundy received no benefit); 2) the relationship between Bundy and his son was one of trust and confidence-Bundy’s affection for his son had great influence on him; 3) There was a lack of independent legal advice-the bank should have suggested that the father receive independent legal advice; 4) There was clear unequal bargaining power.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Read the fine print

Ensure understanding of all parts of a contract by reading the contract and asking for clarification.

The signer has the responsibility of knowing the terms of the contract(s) and carefully signing. The court will not support any carelessness.

For example, in Marvco Colour Research v Harris [1982 SCC], Harris signed a contract in favor of the lender, Marvco. He was assured by a third party that the contract was merely an amendment to an initial mortgage. Harris did not read the contract. Turns out that he signed a second mortgage. Harris tried to avoid liability on the basis of the defence of non est factum (he did not understand the nature of what he signed due to the misrepresentation by the third party). The court concluded that to invoke the doctrine of non est factum, there cannot have been any carelessness.

Non est factum is a defense in law that prevents liability for the signer of a contract if they did not fully understand and appreciate what they were.

However, courts have distinguished this from carelessness. Some factors that could influence “carelessness” rather than non est factum are when:
– The signer speaks the language of the contract;
– The signer is literate;
– The signer has signed the same contract before the signer should have knowledge of the terms of the contract); or
– The signer if sophisticated and educated.

Commercial counterparties often cannot rely on this as a defense because they will have, or will be presumed to have, hired lawyers to negotiate the contract. In present times, some counterparties (usually a bank) will require that independent legal advice is sought by a mortgagor.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Doubt on Acceptance of Terms of Use

Links from this article:
Read the article here.

Websites and internet service providers should consider inserting as many positive steps as possible to ensure that the user is aware it is bound by terms of use or terms of service to ensure the enforceability of those terms. This is something that can be addressed in the registration process.

A recent case in the US discussed the difference between “clickwrap” and “browsewrap” agreements. A clickwrap requires a positive action on the part of the user, but a browsewrap does not (usually just a link to the terms of service of the website).

In this case, the user was successful in arguing that they weren’t subject to the terms of use of a website that had a browsewrap agreement.

Read the article here.

 

Take away:

  • The drafter of a “browsewrap” terms of use (where only a link is provided to the terms of use) will wish to ensure that the user is completely aware that it exists, as it may be unenforceable if it is too hidden.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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