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Rajah Lehal

'Unfair' agreements may be rejected by the court

October 27, 2016

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

Generally, when a signor 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. 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:
  6. Consideration moving to the bank was grossly inadequate (Bundy received no benefit);
  7. the relationship between Bundy and his son was one of trust and confidence-Bundy’s affection for his son had great influence on him;
  8. There was a lack of independent legal advice-the bank should have suggested that the father receive independent legal advice;
  9. There was clear unequal bargaining power.
Independent Legal Advice
Case Law

Written by Rajah. Rajah Lehal is Founder and CEO of Clausehound.com. Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.