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Unconscionable Transactions, Undue Influence and Constructive Trusts Assoc Prof Cameron Stewart.

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1 Unconscionable Transactions, Undue Influence and Constructive Trusts Assoc Prof Cameron Stewart

2 Purpose The purpose of the doctrine is to provide relief in situations where one party to a transaction has actively taken advantage of the weakness of the other. In this way, equity seeks to look beyond the fiction of equality of bargaining power that the common law takes for granted. Pursuant to the doctrine of unconscionability, equitable relief is given where there has been ‘an abuse of power possessed by one party over the other by virtue of the other’s position of special disadvantage’: Australian Competition and Consumer Commission v Radio Rentals Ltd (2005) 146 FCR 292, at 297.

3 Purpose In Louth v Diprose (1992) 175 CLR 621, at 638; 110 ALR 1, at 14, Deane J observed that ‘the intervention of equity is not merely to relieve the plaintiff from the consequences of his own foolishness. It is to prevent victimisation’

4 General or specific term? in Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 at 324-5; 201 ALR 359, at 364-5, the High Court held that ‘unconscientious’ is a more accurate term than ‘unconscionable’ in this context

5 Elements In CBA v Amadio, at CLR 474; ALR 422, Deane J said: The jurisdiction is long established as extending generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that disability was sufficiently evident to the stronger party to make it prima facie unfair or ‘unconscientious’ that he procure, or accept, the weaker party’s assent to the impugned transaction in the circumstances in which he procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable.

6 Elements Spigelman CJ in Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557, at 583: Unconscionability is a well-established but narrow principle in equitable doctrine. It has been applied over the centuries with considerable restraint and in a manner which is consistent with the maintenance of the basic principles of freedom of contract. It is not a principle of what ‘fairness’ or ‘justice’ or ‘good conscience’ requires in the particular circumstances of the case … [R]estraint in decision- making remains appropriate. Unconscionability is a concept which requires a high level of moral obloquy. If it were to be applied as if it were equivalent to what was ‘fair’ or ‘just’, it could transform commercial relationships … The principle of ‘unconscionability’ would not be a doctrine of occasional application, when the circumstances are highly unethical, it would be transformed into the first and easiest port of call when any dispute … arises

7 Elements The essential elements are, as Deane J identifies: A is under a special disadvantage or disability; B knew, or is likely to have known, about that disadvantage; and B proceeds to use that disadvantage unconscientiously in order to obtain A’s consent to the transaction.

8 Bargaining Power Practical recognition of these observations can be seen in the fact that mere inequality of bargaining power between parties does not give rise to a situation of unconscionability. In Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51, at 64; 197 ALR 153, at 157, Gleeson CJ said: A person is not in a position of relevant disadvantage … simply because of inequality of bargaining power. Many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests … Unconscientious exploitation of another’s inability, or diminished ability, to conserve his or her own interests is not to be confused with taking advantage of a superior bargaining position.

9 Timing In Gustav & Co Ltd v Macfield Limited [2008] NZSC 47, at [5], the New Zealand Supreme Court held that the appropriate time to assess whether a conditional contract was unconscionable was when the contract was entered into and not when it became, or was declared, unconditional. However, the Court, at [21], went on to note that ‘material variations to a contract should be examined for unconscionability as at the date upon which they are agreed’.

10 Special Disadvantage There is no fixed list of what constitutes a special disadvantage. What is required is some characteristic ‘which seriously affects the ability of the innocent party to make a judgment as to his own best interests’: CBA v Amadio, at CLR 462; ALR 413.

11 Special Disadvantage In Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301, at 318; 189 ALR 76, at 92, the Full Court of the Federal Court stated that factors going to establishing a special disadvantage fell into one of two categories; ‘constitutional’ and ‘situational’. The court said: The special disadvantage may be constitutional, deriving from age, illness, poverty, inexperience or lack of education. Or it may be situational, deriving from particular features of a relationship between actors in the transaction such as the emotional dependence of one on the other.

12 Knowledge It is clear that the defendant must have known or ought to have known of the special disadvantage of the other party. The requirement of knowledge is necessary because the defendant cannot be said to have acted unconscientiously if he or she had no knowledge of the plaintiff’s special disadvantage

13 Unconscionable exploitation of the disadvantage The stronger party must exploit the weakness that he or she knows to exist in the other in order to procure consent to a transaction. Inequality of bargaining power will often be a factor to be taken into account in assessing whether the stronger party has taken advantage of the weaker party’s special disability.

14 Examples In CBA v Amadio the Amadios’ special disadvantage was knowingly used to procure them into signing a contract of guarantee, which was not limited by time or extent of liability, to secure a loan to their son who was in serious financial trouble. In Louth v Diprose the infatuated Diprose made a gift of $58,000 to Louth so that she could purchase a house. In Blomley v Ryan the drunken Ryan sold his entire landholding to Blomley at a price described by McTiernan J, at 392, as ‘strikingly disproportionate’ to the estimated market value.

15 Legislation The federal, state and territory legislatures have all enacted legislation which deal with unconscionable conduct and/or related concepts dealing with what might generally be referred to as unfair conduct.

16 Legislation In Part IVA of the Trade Practices Act, entitled ‘Unconscionable Conduct’, ss 51AA, 51AB and 51AC deal with statutory forms of unconscionability. In all three sections there are prohibitions against corporations, in the course of trade or commerce, engaging in unconscionable conduct. The need for a corporation to be involved is a consequence of the federal government’s limited legislative power under s 51 of the Commonwealth Constitution. The federal government must have a legitimate grant of power in order for its laws to be valid. The trade and commerce power (s 51(i)) presents problems as it specifically precludes federal legislation in intrastate matters, hence recourse to the more amenable corporations power (s 51(xx)), which will apply to intrastate matters so long as a sufficient connection to corporations may be found.

17 Legislation Section 51AAB of the Act stipulates that ss 51AA and 51AB do not apply to conduct involving financial services. However, the provisions of ss 51AA, 51AB and 51AC are replicated, in relation to financial services, in ss 12CA, 12CB and 12CC of the Australian Securities and Investments Commission Act 2001 (Cth). In order to cover cases where the conduct is not within the provisions of either of these two federal acts, complementary legislation is found in some states and territories that may enable an applicant to seek relief. Section 51AA is replicated only in Victoria.[1] Section 51AB is replicated in all states and territories.[2] Section 51AC has been replicated in Tasmania and Victoria,[3] as well as in retail leases legislation in all states and territories, with the exception of South Australia.[4][1][2][3][4] [1] Fair Trading Act 1999 (Vic) s 7. [1] [2] Fair Trading Act 1992 (ACT) s 13; Fair Trading Act 1987 (NSW) s 43; Consumer Affairs and Fair Trading Act 1990 (NT) s 43; Fair Trading Act 1989 (Qld) s 39; Fair Trading Act 1987 (SA) s 57; Fair Trading Act 1990 (Tas) s15; Fair Trading Act 1999 (Vic) s 8; Fair Trading Act 1987 (WA) s 11.[2] [3] Fair Trading Act 1990 (Tas) s 15A; Fair Trading Act 1999 (Vic) ss 8A and 8B.[3] [4] Leases (Commercial and Retail) Act 2001 (ACT) s 22; Retail Leases Act 1994 (NSW) ss 62A and 62B; Business Tenancies (Fair Dealings) Act, 2003 (NT) ss 79 and 80; Retail Shop Leases Act 1994 (Qld) ss 46A and 46B; Fair Trading (Code of Practice for Retail Tenancies) Regulations 1998 (Tas) Cl 3; Retail Leases Act 2003 (Vic) ss 77 and 78; Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) ss 15C and 15D.[4]

18 Legislation it is clear that the notion of unconscionable conduct under ss 51AB and 51AC is broader than unconscionable conduct in equity: Australian Competition and Consumer Commission v Simply No- Knead (Franchising) Pty Ltd (2000) 104 FCR 253, at 265; 178 ALR 304, at 315; Canon Australia Pty Ltd v Patton (2007) 244 ALR 759, at

19 Legislation In ACCC v Samton Holdings, at FCR 317; ALR 91, the court identified the following four ways in which unconscionable conduct has been used in the case law: 1. As an organising idea informing specific equitable rules and doctrines which do not in terms refer to, or require, an explicit finding of unconscionable conduct - eg rules on stipulations as to time and notices to complete. 2. In relation to specific equitable doctrines of which estoppel, unilateral mistake, relief against forfeiture and undue influence are examples. They are united by the idea that equity will prevent an unconscionable insistence on strict legal rights and are conditioned upon the explicit finding of unconscionable conduct in the persons against whom they are invoked. 3. In relation to the discrete doctrine of unconscionable dealing which concerns one species of unconscionable conduct. 4. In relation to unconscionable conduct founding a cause of action not mediated by any discrete doctrine.

20 Undue Influence Whereas the common law has traditionally assumed that the parties to particular transactions have equal bargaining power, equity recognises that often this may not be the case and it may enable a party to set aside a transaction where it can be shown that the relationship between the parties was tainted by inequality, unfairness or actual abuse.

21 Undue Influence In equity, the principle of undue influence also focuses on the quality of consent given to the transaction. This was made clear by Deane J in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, at 474; 46 ALR 402, at 423, when he said that ‘[u]ndue influence, like common law duress, looks to the quality of the consent or assent of the weaker party’. The purpose of the doctrine of undue influence is ‘to protect people from being forced, tricked or misled in any way by others into parting with their property’: Allcard v Skinner, at

22 Undue Influence It is clear that the doctrines relating to unconscionable transactions and undue influence are closely related. But just how closely is a matter of some debate. Hardingham, while making it clear that he was not advocating a ‘general unifying principle of universal application’, made the following statement: [T]he boundaries between traditional heads of intervention against unconscionable behaviour — specifically between common law duress and actual undue influence or pressure, between presumed undue influence and unconscionable dealing as such — are shifting. Lines of demarcation are not now as clearly defined as they may have been in the past. As a consequence, the traditional heads themselves may be ready for some redefinition or rationalisation.[1][1] [1] I Hardingham, ‘Unconscionable Dealing’ in P D Finn (ed), Essays in Equity, Law Book Co, Sydney, 1985, 1, p 2. [1]

23 The classic statements in this regard are both derived from Commercial Bank of Australia v Amadio (1983) 151 CLR 447; 46 ALR 402. In that case, Deane J said, at CLR 474; ALR 423: Undue influence, like common law duress, looks to the quality of the consent or assent of the weaker party … Unconscionable dealing looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so.

24 Categories of Undue Influence Traditionally there have existed two distinct categories of transactions that attract equitable intervention on the basis of the principles of undue influence. The distinguishing characteristic between the two categories is whether there is, or is not, a special relationship between the parties to the transaction. Cases in which there is no special relationship between the parties are generally referred to as ones of actual or express undue influence. Cases in which a special relationship exists between the parties, are generally referred to as ones of presumed undue influence, and can be sub-categorised according to the basis upon which the existence of the special relationship is established

25 Actual Undue Influence In cases where there is no special relationship between the parties to the transaction, a person seeking equitable relief on the basis of the principles of undue influence must establish that actual undue influence was exerted by the other party to the transaction

26 Actual Undue Influence In Johnson v Buttress (1936) 56 CLR 113, at 134, in discussing such cases, Dixon J said: The source of power to practise such a domination may be found in no antecedent relation but in a particular situation, or in the deliberate contrivance of the party. If this be so, facts must be proved showing that the transaction was the outcome of such an actual influence over the mind of the alienor that it cannot be considered his free act.

27 Actual Undue Influence Cases of actual undue influence are uncommon. They are also difficult to prove. Thus, in Frederick v State of South Australia (2006) 94 SASR 545, a South Australian magistrate resigned from his position during a meeting with the Chief Magistrate. The magistrate had been recently convicted of two criminal offences. However, the convictions were subsequently set aside. The magistrate argued that the resignation was ineffective on the basis that it was procured by the exertion of actual undue influence by the Chief Magistrate. The Supreme Court rejected the claim on the basis that the magistrate, as a person who had had a long career as a lawyer and magistrate, was not in a position of being the victim of actual undue influence.

28 Actual Undue Influence White J, at 580, said the following in relation to the magistrate’s decision to resign: I accept that [he] valued his position as a magistrate both for the honour which the office entailed, his satisfaction with the work and because it was his source of livelihood. I accept that [he] wished to maintain his position as long as practicable and that he signed the resignation letter reluctantly. I accept that immediately before signing the resignation letter he said words to the effect that he felt that he did not really have any choice but to resign with dignity, and that that statement reflected his state of mind at that time. However, that evidence falls short, in my opinion, of establishing that [his] will was overborne or that his agreement to resign was procured by undue influence. The fact that the choices apparently open to him were unpalatable does not indicate that his will was overborne. It is an unfortunate fact that often people are called upon to make difficult decisions and, in particular, to make decisions which they would prefer very much not have to make. Where a person confronts the circumstance, and makes the difficult decision, it will often be inappropriate to speak of their will having been overborne. In my opinion, that is the position in the present case.

29 Presumed Undue Influence The existence of the special relationship gives rise to a presumption that the transaction was obtained as a result of undue influence by the stronger party in the relationship over the weaker party. The presumption of undue influence only arises upon proof of the existence of a special relationship. The effect of the presumption is that the weaker party will be able to seek equitable relief, unless the presumption of undue influence is rebutted by the stronger part Class 2A and 2B

30 Presumed Undue Influence Class 2A include those existing between: parent and child: Lancashire Loans Ltd v Black [1934] 1 KB 380; guardian and ward: Hylton v Hylton (1754) 28 ER 349; solicitor and client: Westmelton (Vic) Pty Ltd v Archer & Shulman [1982] VR 305; doctor and patient: Bar-Mordecai v Hillston [2004] NSWCA 65; and religious leader and follower: Allcard v Skinner.

31 Presumed Undue Influence In Royal Bank of Scotland v Etridge, at AC 797; All ER 460, Lord Nicholls asserted that a presumption arising by virtue of a recognised class of relationship is ‘irrebuttable’. This approach has, however, been rightly rejected in Australia: Janson v Janson [2007] NSWSC 1344, at [93]. However, it is difficult to rebut such a presumption and even being able to explain the relationship in some other way, such as that the parties were also in a de facto relationship, will not guarantee success: Bar-Mordecai v Hillston, at [149]..

32 Presumed Undue Influence There are suggestions that the trustee-beneficiary relationship is a Class 2A relationship: Union Fidelity Trustee Co of Australia Ltd v Gibson [1971] VR 573, at 577, and Johnson v Buttress, at 119. However, as Meagher, Heydon and Leeming[1] observe, there is no justification, in the absence of special circumstances, for suggesting that there is a relationship of undue influence between a trustee and beneficiary, and that unless the transaction is one involving trust property, there should be no presumption invalidating the transaction. In cases where trust property is involved, a beneficiary is already protected by the rules relating to fiduciary obligations [1] R Meagher, D Heydon & M Leeming, Meagher Gummow & Lehane’s Equity, Doctrines and Remedies, 4th ed, LexisNexis Butterworths, Sydney, 2002, pp [1]

33 Class 2B If the parties to the transaction do not fall within a Class 2A relationship, a special relationship can nevertheless be established on the particular facts and circumstances of their relationship. These Class 2B relationships arise ‘where it is proved that the party benefiting from the transaction occupies or assumes towards another a position naturally involving an ascendancy or influence over that other, or a dependency or trust on the latter’s part’: Janson v Janson [2007] NSWSC 1344, at [72].

34 Example In Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30, Bester, as a young woman, was encouraged to make a settlement of a substantial inheritance received from her father. The effect of this irrevocable document was to put the assets, which comprised her inheritance, beyond her control and provide her with only a modest annual income from the property. At the time of settlement, Bester was 21 years of age, without parental guidance and possessed of extremely limited business experience. She was influenced by three much older men — the representative from her trustee company, and her two uncles, one of whom was the solicitor who drafted the deed of settlement. In these circumstances, Street J had little difficulty in finding that undue influence was raised successfully by Bester who was, after many years, seeking to rescind the settlement. His Honour, at 34–5, said:

35 Example The present relationship is very close to, if not indeed, within, the scope of the traditional relations. But whether within or without the traditional relations, the present facts involve a degree of confidence equivalent thereto … Indeed, the very presence, in the circumstances surrounding this deed, of the paternal element that pervades the discussions between all concerned is consistent with, and corroborates, the existence of the special relationship of influence.

36 Rebuttal Once the applicant has satisfied the court that there is a case of actual undue influence or the existence of a special relationship of influence, the stronger party to the transaction has the task of rebutting the presumption that the transaction was the result of undue influence. The aim of the stronger party is not necessarily to rebut the nature of the relationship but rather to focus upon proving that ‘the gift was the independent and well- understood act of a man in a position to exercise a free judgment based on information as full as that of the donee’: Johnson v Buttress (1936) 56 CLR 113, at 134. This test is not satisfied simply by establishing that the donor understood the transaction: Bar-Mordecai v Hillston [2004] NSWCA 65, at [167], [183].

37 Yerkey Yerkey v Jones, Mr and Mrs Yerkey brought a claim against Mr and Mrs Jones that arose out of a mortgage over real property. Mr and Mrs Jones entered into a contract for the purchase of a poultry farm at Payneham near Adelaide. The purchase price was to be paid in instalments. However, it was a condition that part of the purchase price be secured by way of a second mortgage over another property owned by Mrs Jones. Mr Jones negotiated the sale conditions with Mr Yerkey and it was not until a week after agreeing to buy the property that Mr Jones advised Mrs Jones that he had agreed to buy the Payneham property and that he might get into trouble if Mrs Jones did not provide a mortgage over her property. Shortly thereafter Mrs Jones gave a second mortgage as was requested. Mr and Mrs Jones received advice from Mr Yerkey’s solicitors. Subsequently, Mrs Jones took proceedings to have the mortgage set aside.

38 Yerkey Although the High Court denied Mrs Jones any equitable relief, the judgment of Dixon J is important in that it articulates the existence of a special equity that protects the position of a wife acting as a guarantor in relation her husband’s debts. Dixon J, at 678, said: Although the relation of husband to wife is not one of influence, yet the opportunities it gives are such that if the husband procures his wife to become surety for his debt a creditor who accepts her suretyship obtained through her husband has been treated as taking it subject to any invalidating conduct on the part of her husband even if the creditor be not actually privy to such conduct

39 Yerkey in Garcia v National Australia Bank (1998) 194 CLR 395; 155 ALR 614, the majority of the High Court dramatically re-affirmed the principle in Yerkey v Jones. In that case a married woman and her husband executed a mortgage in 1979 in favour of the National Australia Bank that was secured over their matrimonial home. The mortgage not only secured all money owing under the mortgage, it also secured any money owing pursuant to future guarantees given by either the husband or the wife to the bank. Between 1985 and 1987, the wife signed several guarantees relating to loans made to businesses conducted by the husband. There was no explanation of the precise extent of these transactions by the creditor to the wife. Although she was a capable and professional woman who had her own business as a physiotherapist, she did not realise that the guarantees were also linked to the mortgage entered into in Importantly, the wife obtained no personal benefit from the transactions. In 1989, the woman and her husband were divorced and she commenced proceedings to have the guarantees set aside.

40 Yerkey The High Court majority, in setting aside the guarantees, found that, despite there being no actual undue influence by the husband, it was nevertheless unconscionable for a creditor to enforce a guarantee in such circumstances. The High Court majority noted that there were two possible ways in which a wife in such circumstances could seek equitable relief. The first is where there is actual undue influence by a husband over a wife and the second is where, in the absence of actual undue influence, the Yerkey v Jones principle applies..

41 Constructive trusts to remedy unconscionable conduct Muschinski v Dodds (1985) 160 CLR 583 Baumgartner v Baumgartner (1987) 164 CLR 137

42 Constructive trusts to remedy unconscionable conduct Turner v Dunne [1996] QCA 272 at 4–5 as: 1. A constructive trust may be imposed even though the person held to be trustee had no intention to create a trust or hold property on trust. 2. An intention to create a trust may be imputed where it is necessary to do so ‘in good faith and in conscience’. 3. A principle which may be applied is that which restores to a party contri­butions made to a joint endeavour which fails, when the contributions have been made in circumstances in which it was not intended that the other party should enjoy them. 4. Contributions, financial and otherwise, to the purposes of the jointed rela­tionship are relevant for this purpose.

43 Constructive trusts to remedy unconscionable conduct Turner v Dunne [1996] QCA 272 at 4–5 as: 1. A constructive trust may be imposed even though the person held to be trustee had no intention to create a trust or hold property on trust. 2. An intention to create a trust may be imputed where it is necessary to do so ‘in good faith and in conscience’. 3. A principle which may be applied is that which restores to a party contri­butions made to a joint endeavour which fails, when the contributions have been made in circumstances in which it was not intended that the other party should enjoy them. 4. Contributions, financial and otherwise, to the purposes of the jointed rela­tionship are relevant for this purpose.

44 The effect of legislation on constructive trusts in the family context Section 79 of the Family Law Act 1975 (Cth) Property (Relationships) Act 1982 (NSW) In New South Wales the definition of de facto relationships includes all rela­ tionships between two adult persons who live together as a couple on a genuine domestic basis

45 The effect of legislation on constructive trusts in the family context The ACT, New South Wales and Tasmania have expanded their legislative regimes to include claims made by parties in ‘domestic relationships’ (in ACT and NSW) and ‘personal relationships’ (in Tasmania)

46 The remaining importance of equity Not all relationships Equity preserved Deceased parties Third parties


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