Contract signed under undue influence
What is undue influence?
It concerns with the exploitation or abuse of a relationship of trust and confidence where one party has influence over another. The party benefit from the relationship must has an intention to exercise influence over the party. Such that the weaker party lacks freewill to enter into the contract. The law targets the unfair outcome procured by the stronger party who benefits from abusing such relationship as a result of creating significant disadvantage of the weaker party.
Two (2) categories of special relationship
A special relationship has to exist in an undue influence. There are two categories of special relationship in undue influence: actual undue influence and presumed undue influence.
Category 1 - Actual undue influence
It focusses on the transaction rather than the relationship of the party. Undue influence is proved by direct evidence of some advert act by undue influence exercise in that transaction
Category 2 – presumed undue influence
The presence of a special relationship among party give rise to a presumption that the transaction is obtained as a result of undue influence by the stronger party
Sub-category 2a – relationship by virtue of their type or class
Established classes include doctor-patient, solicitor-client, religious leader, Parent-child (benefit flow from parent to child does not fit in this category but might fall into the next category) etc.
Sub-category 2b – relationship of trust and confidence
A special relationship exists when the stronger party occupied the position of dependency over the weaker party. In John v Buttress, the weaker party in this case is illiterate, inexperience in business matter and possessed less than average intelligence. He then became so dependent on the stronger party that the relationship influences him existed.
Undue influence and third parties
It is a situation where the stronger party is not a direct recipient of a benefit from the weaker party, but a beneficiary through a third party. For example, the stronger party obtains loan from a bank/ creditor (the third party) and the weaker party act as a guarantee of loan. When the stronger party default in loan, the contract is only formed between the creditor and the weaker party.
To set aside the guarantee, the third party has to have actual or constructive notice of the special relationship of this kind. An actual notice means actual knowledge of undue influence. A constructive notice is pointing to knowledge of a fact which is sufficient to put the party on notice of a special relationship. In Bank of NSW v Roger, the guarantee was set aside because the bank has constructive notice of the uncle and niece relationship.
Another example is that in Yerkeys v Jones, the guarantee was set aside because the wife’s consent to become a surety for her husband is procured by the husband and that she does not fully understand the effect of essential respect. In nowadays, the Yerkey’s principles are no longer limited to heterosexual relationship but apply to all vulnerable parties in personal relationships.
If an undue influence can be shown in a transaction, the contract is voidable and maybe rescinded.
What is unconscionable conduct?
It is a doctrine concerned with the exploitation of bargaining weaknesses. It is the case where the stronger party is taking advantage of the weaker party’s position, even if the weaker party entered into the contract independently and voluntarily.
Three elements constituting unconscionable conduct
1. There is a special disadvantage/ disability
This include poverty; need of any kind; sickness; age; sex; infirmity of body or mind ; drunkenness; illiteracy, or lack of education; lack of assistance or explanation where such was necessary.
2. The stronger party has knowledge of the disability
Actual knowledge is required including ‘’willful ignorance’.
3. The stronger party exploits the disability unconscientiously
The stronger party must exploit the weakness that he or she knows to exist.
In Commercial Bank of Australia Ltd v Amadio, the Amadios were elderly Italian migrants with low level of English proficiency and they did not fully understand the nature of the guarantee. Despite knowing of the special disability, the bank exploits that disability unconscientiously by procuring amadio into signing a contract of guarantee. As a result, the court held that the Amadios are entitled to rescind the contract.
Remedies under the Australian Consumer Law (ACL)
The ACL prohibits two classes of unconscionable conduct: 1) Conduct which satisfied the three elements constituting unconscionable conduct; 2) Unconscionable conduct in connection with supply or acquisition.
The ACL offers an extensive suits of remedies. However, those provisions are limited to conduct that is within ‘trade or commerce’. It is referring to any business or professional activity within, between and outside of Australia that is not conducting in a private capacity.
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