Unconscionability as the Basis of Rendering a Contract

ASSIGNMENT “Discuss whether the doctrine of unconscionability is appropriate to form the underlying basis for a claim of voidable contract on the ground of undue influence” TABLE OF CONTENT

1. Introduction
2. Common Law Countries’ Position
   1. England
   2. Australia
   3. Canada
3. Malaysia’s position
4. Conclusion
5. Bibliography

Introduction According to the Contract Act[1], in section 16(3) when a person entered into a contract with a person who has the position to dominate the will of another, and the transaction appears to be unconscionable, the burden to prove that the contract is not by undue influence lie on the person who has the will to dominate another. Here, it seems that the act was saying the unconscionability is an element of undue influence. However, do the doctrine of unconsionability can be regarded as an underlying basis of the Undue Influence? Doctrine of unconscionability is application of consent based obligations, where someone’s consent to bargain was only procured through external pressure that another person exploited. Basically, unconscionable contract is held unenforceable because no reasonable person would agree otherwise to it. The perpetrator is not allow to benefit, as the consideration is lacking, and to enforce the contract will be unfair. For the defence of unconscionability to apply, contract has to have been unconscionable, that later, the circumstances make the contract irrelevant Unconscionability is understood by jurists as a doctrine used by the court of equity to correct men’s conscience against unconscionable. Until now, inspiring writings and discussions have been made concerning the supposed or probable definition, description, criteria and application of the doctrine Undue influence is the use of power or influence by one person over another in such a way that the stronger party acquires a benefit, either for himself or for some other person.[2] The equitable construct of fiduciary relationships is associated with the doctrine of undue influence, which is distinguished from duress, the threat or use of excessive force. Cases of undue influence are founded upon the principle that one party is in a stronger bargaining position,[3] or has superior knowledge, or superior mental capacity than the other, weaker party who, as a result, relies on the stronger party. Common Law Countries’ Position For the purpose of this assignment, I will firstly discuss the position of the Common Law countries, which are England, Canada and Australia on the use of doctrine of unconscionability as the basis of undue influence. England In cases of undue influence, a relationship exists where one party owes the other an obligation of candor and protection, where the former acquires over the latter a measure of influence, of which the ascendant person then takes unfair advantage. Allcard v. Skinner,[4] took place in the religious climate of nineteenth century England.Back then courts themselves had only recently been reformed then, the case highlighted the growth of undue influence in the nineteenth century as a factor which could spoil a contract. In the case, Miss Allcard gave virtually all her money to a religious sisterhood who devoted themselves to works of charity. Miss Allcard became a sister and left the sisterhood and waited six years before she initiated action for the return of her money. After the trial judge held for the defendant, the case was appealed by raising two questions: (1) whether the gifts were revocable; and (2) if so, whether revocation was competent years after leaving the religious order. Although the majority of the Court of Appeal dismissed the appeal, the enunciation of the equitable rule of undue influence became a vital doctrine. In another case, Earl of Chesterfield v. Janssen[5] involved an unfair agreement for the sale of an inheritance expectancy by an improvident young heir. “no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other.” That view has been echoed in England.”Thus here, it can be conclude that England does agrees that the doctrine of unconscionability is the requirements of Undue Influence. Australia The Australian position commencing with the established High Court decision of Commercial Bank of Australia Ltd v Amadio[6]. Amadio involved two plaintiffs who were elderly migrants with limited knowledge of English and lack of understanding of guarantee documents proffered by the bank, a circumstance that court described as a “special disability.” Amadio has been accepted as stating the law on unconscionability in Australia, as the court in Gregg v Tasmanian Trustees Ltd had held, “at least, the emergence from the shadows of this ground of equitable relief has relegated the doctrine of undue influence to a position of relative unimportance.” The reasons given by the House of Lords for rejecting the case based on undue influence in National Westminster Bank Plc. v. Morgan that unconscionability as an independent ground of relief does not appear large on the English scene[7]. Unconscionability and undue influence overlap, the latter being more limited in scope, concerned as it is with the exercise by the contracting party of an independent and voluntary will.[8]While undue influence has been demoted to a position of relative unimportance in Australia, has an unmistakably defined doctrine of unconscionability. Thus, it may be concluded that in Australia, doctrine of Unconscionability is not the basis of Undue Influence as it stands alone. Canada In Canada, an evolved doctrine of unconscionability ought to identify material distinctions and similarities with the doctrine of undue influence. Otherwise, a blurred distinction might have a deterring effect. For example, one difference is the obligation of a party to refute undue influence where that incident exists by inference or presumption, as opposed to the evidentiary burden on a party pleading unconscionability to show there has been an improper use of power on the facts. The influential case on unconscionability was Fry v. Lane[9] and, although it was decided in 1888, over a year after Allcard v. Skinner,[10] Fry did not mention Skinner in the law report. Fry v. Lane considered future interests, setting set aside a deed taken from a poor and ignorant man at a considerable under value, the vendor having no independent advice. In the case of the equitable doctrines of undue influence and unconscionability, both are said to be “separate and distinct doctrines with closely related principles,”[11] both are separate causes of action, leading to the equitable remedy of rescission. Cases of unconscionability, however, often contain elements of undue influence[12] and the doctrinal distinction is blurred. In Canada, undue influence remains universal compared to unconscionability, but the distinction is unclear. For example, it was stated in MacKay v. Bank of Nova Scotia, that “unequal bargaining power, together with an unfair contract, create a presumption of undue influence.”[13]This statement is at odds with the earlier statement in Norberg v. Wynrib that the “doctrine of unconscionability and the related principle of inequality of bargaining power are evolving.”[14] In conclusion, the boundaries between undue influence and unconscionability have been shifting or evolving, arguably affecting the standard of judicial decision making. While successful cases of unconscionability appear less frequently, the doctrine appears broader in scope than does undue influence. However, for now, the distinction remains unclear, resulting to a very wide interpretation of the doctrines. Malaysian’s Position In Malaysia, the doctrine of unconscionability is considered as still at its infancy but the awareness of the existence of this doctrine seems to be gaining ground. Section 16(3) of the Contract Act placed unconscionable as a mere part of proving undue influence. The Privy Council decision in an Indian case of Poosathurai v Kannappa Chettiar,[15] observed that an agreement is considered `unconscionable' when the lender is in a position to dominate the will of the borrower, and the bargain was `unconscionable' within the meaning of s 16(3).. The decision in Poosathurai was further reaffirmed by Visu Sinnadurai J in Polygram Records Sdn Bhd v The Search & Anor[16]. Malaysian courts are grappling with arguments based on inequality of bargaining power amidst the statutory provision on undue influence in the Contracts Act 1950. In Saad Marw[17]i's case, the Court of Appeal had adopted a different approach. Gopal Sri Ram JCA started his judgment as follows: "This is an important case. It has to do with whether our jurisprudence recognises a doctrine of inequality of bargaining power independent of the well-established doctrine of undue influence. This is the first time, at least as far as I am aware, that this issue has come up for decision at the appellate level." The appellant, a farmer, had rented some land from the respondents ('the leased land') from which he harvested coconuts. The appellant also held two pieces of land ('the property') by prescriptive rights under the land law in force in Penang at the material time. This meant that the appellant's title was defeasible and this defeasibility was confirmed by an indorsement on the title Then, he entered into agreement with responded, but the agreement is in English, and had deceived him. The appellant purported to terminate the agreement with the respondents. The appellant defended the action on a ground that the agreement was vitiated by undue influence.The trial judge rejected and the appellant appealed against the order of the trial judge. On appeal, the appellant argued that while the trial judge was entitled to reject the defence of undue influence, he ought to have held that the appellant had established a case of "unfair advantage" under section 21(2)(a) of the Specific Relief Act 1950[18].According to the Court, this brought to focus the doctrine of inequality of bargaining power falling short of the proof of undue influence under section 16 of the Contracts Act. With this, the Court went on to consider whether Malaysian law recognises a general doctrine of inequality of bargaining . The Court's reference to both the doctrine of inequality of bargaining power and the doctrine of unconscionability in Saad Marwi's case, read literally, would mean that the Malaysian position is wider than the English position where Lord Denning's attempt to invoke the principle of inequality of bargaining power to set aside transactions in Lloyds Bank Ltd v Bundy[19] was clearly rejected by the House of Lords in Westminster Bank Plc. However, in Canada, Lord Denning's principle of inequality of bargaining power has remained an important element in the development of unconscionability even after its rejection in the United Kingdom This has resulted in the Canadian doctrine being a fluid and flexible one, and as described by Gopal Sri Ram JCA in Saad Marwi's case, one which achieves "practical justice".Some legal commentators suggest that “the doctrine of undue influence is about impaired consent, not about wicked exploitation.”[20] A blurred distinction between undue influence and unconscionability exists, however, to the extent that recent cases on unconscionability restate the doctrine with a “kind of legal shorthand expression.”[21] Whether it is possible for unconscionable bargain or transaction to exist separately from the doctrine of undue influence? Apparently, there are several Malaysian cases that provide this answer in positive. The early case of Chait Singh v Budin b Abdullah[22], showed how court was willing to justify the existence of unconscionable bargain on the basis of the position of the parties, without the need to prove the requirement under section 16(1). This case apparently suggests the independency of the doctrine of unconscionable bargain from the doctrine of undue influence in s 16. Gopal Sri Ram JCA suggests in Saad Marwi v Chan Hwan Hwa & Anor that it is possible for Malaysia to import the wider doctrine of unconscionability independent of the doctrine of undue influence into the Malaysian contract law. The proposed wider doctrine is according to the English doctrine but tailored to the broad and liberal Canadian way because of the vulnerability of many Malaysians in matters of commerce and of the insufficiency of statutory protection afforded to Malaysian consumers. It is worth to point that Saad Marwi is held in Koh Yen Bee to be correctly decided based on the merits of the case. There is the possibility that Saad Marwi and Koh Yen Bee have looked at the doctrine of unconscionability from a narrow perspective. However, towver, Hbnusshe Court of Appeal's decision in Saad Marwi v Chan Hwan Hua & Anor [2001] 3 CLJ 98 has brought Malaysia nearer to this front in its recognition of a "wider doctrine of inequality of bargaining power" and the adoption of "the English doctrine [of unconscionability] but apply it in a broad and liberal way as in Canada". Conclusion Unconscionability as an independent doctrine or as a doctrine of wider application is still at its infancy despite the historical evidence that it had been used to correct men's conscience in cases involving equitable frauds. There were several setbacks in its growth, which was hindered particularly by the common law's adherence to the doctrine of freedom of contract and the will theory. Even though the purpose of the doctrine is different from freedom of contract, it contributes towards ensuring security of the contract. 1The fact that the word unconscionable itself is in the Contract Act showed that the legislative wanted it to be a part of the doctrine of Undue Influence, either as a basis or as an element. However, based on the decision by the cases, Doctrine of uncoscionability can also be a separate element from undue influence, being an independent equity itself. It is up to the court to interpret the law in section 16(3), and to really draw a line between unconscionability and undue influence. However, for now, the doctrine of unconscionability is appropriate to form the base for a claim of voidable contract (according to section 20 of the Contract Act) on the ground of undue influence but, it is still open for wider interpretation and alteration. BIBLIOGRAPHY TEXT BOOKS

1. Cheong May Fong, Contract Law in Malaysia (Malaysia, Singapore, Hong Kong: Sweet & Maxwell, 2010)
2. Sinnadurai, Visu, Law of Contract, 4th ed (Butterworths: Lexis Nexis, 2011)
3. Guest, AG (ed), Chitty on Contracts, Volume 1, General Principles, 31st ed (London: Sweet & Maxwell, 2004)

JOURNALS Sykes, N. A. Deakin University.‘Unfair’ results and unfair doctrines: Structuring the application of the equitable doctrines of undue influence and unconscionable dealing. Retrieved on 28th March 2014 Low Hang Yen, Malayan Law Journals Article. Unconscionability As A Ground For Withholding Payment In Demand Guarantees: Should The Exception Be Extended To Letters Of Credit?(2008) Retrieved on 28th March 2014 Black. J. A.Undue Influence And Unconscionability In Contracts And The Equitable Remedy Of Rescission In Canada. Retrieved on 28th Match 2014 Cheong May Foong, Malayan Law Journal Article; A Malaysian Doctrine of Inequality of Bargaining Power and Unconscionability after Saad Marwi. (2005) Retrieved on 30 April 2014 ACTS Act 137 Act 136

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[1] Act 136 [2] Black’s Law Dictionary 743 (3d ed. 2006). [3] Business Dictionary, Inequality of bargaining power, ://www.businessdictionary.com/definition/inequality-of-bargaining-power.html [4] [1887] 36 Ch.D. 145 (Eng.). [5] 28 Eng. Rep. 82 (Ch. 1750). [6] (1983) 151 CLR 447 [7] [1985] AC 686 [8] Gregg v Tasmanian Trustees Ltd., (1997) 73 F.C.R. 91 (Austl.) (citing Sir Anthony Mason, The Place of Equity, 110 L. Q. Rev. 248, 248 – 9 (1994)). Sir Anthony authored this article long after his judgement in Amadio, but before he retired in 1995 as Chief Justice of the High Court of Australia. [9] [1888] 40 Ch. D. 312 (Eng.). [10] [1887] 36 Ch. D. 145 (Eng.). [11] Morrison v. Coast Finance Ltd., [1965] 54 W.W.R. 257 (Can.). [12] Floyd v. Couture, [2004] A.J. No. 377, n.98 (Can. Alta.). [13] 1994] O.J. No. 2498 (Can.). [14] [1992] 2 S.C.R. 226 (Can.). [15] (1919) L.R. 47 Ind. App. [16] [1994]3 MLJ 127 [17] [2001] 3 CLJ 98 [18] Act 137 [19] [1975] QB 326 [20] Birks and Chin, On the Nature of Undue Influence Good Faith and Fault in Contract Law (Beatson & Friedmann eds. 1995). [21] Smyth v. Szep, [1992] 2 W.W.R. 673, 681 – 2 (B.C.C.A.) (Can.). [22] (1918) 1 FMSLR 348

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