Bachelor of Engineering (Hons) Chemical Engineering

UEEG 2113 Law for Engineers

Individual Assignment

Title:

Discuss.

Name: Thang Ern Sern
ID: 1002982
Date: 12 July 2014
Year/Semester: Y4S1
Program: Chemical Engineering
Lecturer: Ir Lai Sze Ching

Doctrine of unconscionability contravenes an important
cornerstone of the Law of Contract, i.e. freedom of
Discussion
The issues on unconscionability and inequality of bargaining power are common
legal dictums, which are constantly and continuously discussed in consumer contracts.
Terms on earnest payment, performance bond, pre-determined damages, standard
exemption and limitation terms in commercial contracts are examples of practices which
arise from the unconscionability and inequality of bargaining power of the contractual parties.
Civil courts in Malaysia apply conventional principles and standards in their determination of
cases involving contract law. In ascertaining whether or not a contract or a contractual
clause is valid, Malaysian courts tend to emphasize the importance of form and procedure
over substance. Subject to a few exceptions, they are inclined to enforce a contract against
a party as long as the documents are properly executed and the circumstances in which the
contract was entered into satisfy the basic requirements of validity. These requirements
according to the Contracts Act 1950 include offer and acceptance, consideration, intention to
create legal relations and capacity. Subsumed under these is the overall requirement of
consent. The factors that would vitiate consent and thus enable the court to intervene
include coercion, undue influence, fraud and misrepresentation or mistake. When a case is
verified to vitiate the factors, the contract is said to be voidable at the option of the innocent
party, according to Section 19 (1) of Contract Acts 1950. However, once a case is
determined to subject under unconscionability, will it have any contravention with the
freedom of contract?
A contract is an agreement between two or more parties, giving rise to obligations
which are enforced or recognized by law. This is defined in Section 2 (h) of Contracts Act
1950. It may be in the form of writing, by word of mouth, by conduct or by any combination of
such. Section 10 of the Contracts Act 1950 defines a contract as all agreements made with
the free consent of parties competent to contract. One of the most essential features of a
contract is the freedom of contract, in which contracting parties must be allowed to enter into
a contract freely. The parties must be permitted to enter into agreements of their own choice
and on their own terms. The doctrine of freedom of contract also states that nobody shall
have contractual obligations imposed upon them without their consent. Therefore, with this
doctrine, parties should be as free as possible to make agreements on their own terms
without the interference of the courts or Parliament and their agreements should be
respected, upheld and enforced by the courts.
The principle concerning unconscionability was initially propounded by Lord
Denning in the case of Lloyds Bank v. Bundy [1975] QB 326 where it was held that
unconscionable transaction between parties may be set aside by the court of equity. This
unconscionable category is said to extend to all cases where unfair advantage has been
gained by an unconscientious use of power by a stronger party against a weaker.
Unconscionability is understood by jurists as a doctrine used by the court of equity to
correct mens conscience against conducts and bargains that are unconscionable. This
understanding is derived from the judgments in several early English cases including the
Earl of Oxfords Case (1615), Earl of Chesterfield v Janssen (1751) and Earl of
Aylesford v Morris (1873).
Unconscionability is determined by examining the circumstances of the parties when
the contract was made; these circumstances include, for example, the bargaining power,
age, and mental capacity of the parties. The doctrine is applied only where it would be an
affront to the integrity of the judicial system to enforce such contracts. "Inequality of
bargaining power" is another term used to express essentially the same idea for the same
area of law, which can in turn be further broken down into cases on duress and undue
influence. When a court uses the word unconscionable to describe conduct, it means that
the conduct does not conform to the dictates of conscience. In addition, when something is
judged unconscionable, a court will refuse to allow the perpetrator of the conduct to benefit.
From this, the result of the court will definitely interfere the contract or agreement made
under consent by both parties there is unconsciounability judged. The following part of the
essay will discuss some cases related to unconscionability.
In the case Malaysian Refining Company Sdn Bhd v Sumatec Engineering and
Construction Sdn Bhd [2011], the appellant (`Sumatec') was appointed by the respondent
(`MRC') to be its contractor for a project (`the Structural Steel works contract'). Sumatec was
to also provide a bank guarantee for the due performance of the contract. It was Sumatec's
assertion that they had duly completed all works required of them by delivery of all agreed
steel structure, which was confirmed by the respondent through the issuance of a
Provisional Acceptance Certificate. However, a dispute arose between the two parties and
subsequently Sumatec was informed that MRC had proceeded to make a demand for
payment or encashment of the bank guarantee. Sumatec contended that MRC's call on the
bank guarantee amounted to unconscionable conduct and this in itself was sufficient ground
to challenge the calling for payments under the said bank guarantee. In the High Court,
Sumatec succeeded in obtaining an injunction to restrain the respondent from calling upon
the bank guarantee issued by Bank Islam Malaysia Berhad (BIMB). However, the Court of
Appeal found that MRC was not guilty of any unconscionable conduct to restrain it from
calling on the bank guarantee and had allowed MRC's appeal, concluding that the balance
of convenience tipped in favour of MRC and that damages would, at the end of the day, be a
sufficient remedy for Sumatec.
As stated in the case, the facts of an individual case must be considered:
On the issue of "unconscionability" as raised by the respondent, even assuming the
principle is to be applied and adopted in the present case, it must clearly be
established and proven by evidence in the circumstances of the case. As in the case
of fraud, to establish unconscionability there must be placed before the court
manifest or strong evidence of some degree in respect of the alleged unconscionable
conduct complained of, not a bare assertion. Hence, the Respondent has to satisfy
the threshold of a seriously arguable case that the only realistic inference is the
existence of unconscionability which would basically mean establishing a strong
prima facie case unconscionability should only be allowed with circumspect
where events or conduct are of such degree such as to prick the conscience of a
reasonable and sensible man.
.. It is not possible to define "unconscionability" other than to give some very
broad indications such as lack of bone fides. What kind of situation would constitute
"unconscionability" would have to depend on the facts of each case.
.. Based on the above considerations, we are of the view that there is no simple
formula that would enable the court to ascertain whether a party had acted
unconscionably in making a call on an on-demand performance bond or bank
guarantee. In the final analysis, whether or not "unconscionability" has been made
out is largely dependent on the facts of each 5 case. In every case where
"unconscionability" is made out, there would always be an element of unfairness or
some form of conduct which appears to be performed in bad faith.
This indicates that whether or not unconscionability is found to exist would depend
largely on the facts of each case. Sumatec claimed that it is unconscionable that MRC called
upon the bank guarantee without its consent. On the facts of this case, it was held that
although Sumatec had raised several incidences of the alleged unconscionable conduct on
the part of MRC, it had not proven unconscionability. In this case, juries had influences on
the contract between Sumatec and MRC to determine if the conduct is unconscionable
conduct or not. It can be seen that from this case, when the conduct is determined as
unconscionable in the High Court, the contract could not be enforced. However, in the end,
the injunction by Sumatec was denied to call the act of MRC as an unconscionable conduct
based on the materials provided to the court. This shows that there are no true way to
decide whether a conduct is unconciousable or not, and it depends on the methods done by
jurists who will make the decisions. Hence, doctrine of unconsciounability can contravene
with the freedom of contract in where both parties are free to enter into contract.
Besides that, unconscionable conduct which deals with transactions between
dominant and weaker parties, also overlaps with duress and undue influence.
Unconscionable conduct is prohibited both in equity and, more recently, by statute.
Duress or coercion refers to a situation whereby a person performs an act as a result
of violence, threat or other pressure against the person. Defined in Section 15 of the
Contracts Act 1950, it is the committing, or threatening to commit any act forbidden by the
Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice
of any person whatever, with the intention of causing any person to enter into any agreement.
It is separated into two types: Physical Duress and Economical Duress. Some example for
physical duress are duress to the person and duress to goods. In Barton v Armstrong
[1976] AC 104, a decision of the Privy Council, Armstrong threatened to kill Barton if he did
not sign a contract, which was set aside due to duress to the person. Hawker Pacific Pty
Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298, the contract was set aside after
Hawker Pacific's threats to withhold the helicopter from the plaintiff unless further payments
were made for repairing a botched paint job, and this is an example for duress of goods.
These are examples for when unconscionability is judged, the court can set aside the
contract, thus interfere the freedom of contract between two parties or more. However, in
these examples, doctrine of unconsciounability stands on a good side to prevent
overpowered party to gain stronger benefits from the other. In fact, it strikes for fairness
between both parties that have not come into agreement in peace and it also finds to
achieve justice for the weaker parties that could not protect themselves and go into contract
without other possible way.
Economic duress might exist, for example, where the dominant party threatens not to
perform a contract - although not all such threats will constitute duress - in particular, if other
options were available to the weaker party (purchasing the product elsewhere, seeking legal
remedies) duress will not be established. One example for economic duress is in The
Siboen and The Sibotre [1976] 1 Lloyds Rep 293. There was a threat by charterers of two
ships to break their charter parties by not paying the agreed charter rate unless that rate was
lowered. The owners were informed that the charterers had no substantial assets and that
the parent company of the charterers would allow it to go into liquidation unless the hire
rates were reduced. That information was untrue but nevertheless caused the owners to
agree a reduction in the charter rate. The Court found for the owners on the basis of
misrepresentation but accepted the principle that economic duress could apply.
Another example is the case CTN Cash & Carry v Gallagher [1994] 4 All ER 714
where the defendants sent a consignment of cigarettes to the wrong address. The cigarettes
were then stolen. The defendant mistakenly believed that the cigarettes were at the
claimant's risk and sent them an invoice. The defendant threatened to withdraw the
claimant's credit facility unless the invoice was paid. The claimants needed the credit
facilities and so paid the invoice and then sought to reclaim the money on the grounds of
economic duress. The threat to withdraw credit facility was lawful since under the terms of
the credit agreement credit could be withdrawn anytime. Therefore the threat was legitimate
and consequently, economic duress could not be established. Both the example shows
economic duress can be arose from unconscionable conducts and for the latter case,
economic duress does not apply and it is not unconscionable because of the terms stated in
the contract. It shows that the facts are important to determine whether an act is considered
unjust and unconscionable, and that decision could place a contract to non-enforceable.
Undue influence can also be arose by unconscionable conduct. The doctrine of
undue influence refers to a situation where the weaker party is influenced into entering into
an agreement. Section 20 provides that such free consent would not exist where the consent
was caused by undue influence. Undue influence is classified into actual undue influence
and presumed undue influence by the House of Lords in Barclays Bank v OBrien (1993) 4
All ER 417. One example is Johnson v Buttress (1936) 56 LLR 113. Mrs. Johnson (the
appellant), had for many years looked after the deceased, Buttress. Buttress was illiterate,
unsophisticated in business affairs and reliant upon Johnson. Buttress transferred ownership
of a piece of land to Johnson without receiving independent legal advice. After Buttress'
death, this transfer was challenged by his son. His son argued that the decision to give away
the house was done under undue influence. Under Class 2B, if the complainant can prove
that he has reposed trust and confidence in the wrongdoer, this existence of relationship will
raises the presumption of undue influence. The plaintiff wins. Case law determines that an
older persons emotional dependence can be a special disadvantage. (Louth v Diprose
(1992) 175 CLR 621; Bridgewater v Leahy (1998) 194 CLR 457.) For example, the older
person and an adult family member meet on unequal terms and the adult family member
takes advantage of their position to obtain a benefit through an improvident transaction
(Bridgewater v Leahy at para 123). In this case, all judges dismissed the appeal, finding
undue influence. The majority did so on the basis of 'presumed' undue influence, making no
finding of actual undue influence. Although there was no evidence that Johnson had actually
pressured Buttress to make the transfer, there was an antecedent relationship between them
because Buttress placed trust and confidence in Johnson and relied upon her for advice.
Section 16 (2) (b) from Contracts Act 1950 provides the situation where he makes a
contract with a person whose mental capacity is temporarily or permanently affected by
reason of age, illness, or mental or bodily distress. where the person is in a position to
dominate the will of another. When proven unconscionability, the wrongdoer has to prove
that the contract was not induced by undue influence, as stated in Section 16 (3) of
Contracts Act 1950. However, Johnson could not prove it and there was evidence that
Buttress did not realize he was parting with his property permanently. Therefore, although
there is an agreement, the transaction is not applied when there is proven undue influence
arose from unconscionability. In this case, although doctrine is said to stand for justice for
the weaker party (the plaintiff), but it could also possible that the appellant serve the
deceased, Buttress very well and she deserved the gift. If it is true that the appellant had
served wholeheartedly, then the result of this case is unfair, the doctrine of
unconsciounability does not reach for justice for the appellant. However, this is unprovable
whether she has done a great job or whether it was the greed of the deceaseds son.
Furthermore, she was also unable to prove that there is no undue influence between the
deceased and her. In this case, it could be imparted that sometimes doctrine of
unconsciounability could not fight for fairness and justice when there is unprovable facts, and
when unconscionability is judged, the contract will be set aside and no gift will be permitted
although there is already a consent made from both parties.
Some other cases related to unconscionability are Blomley v Ryan (1956) 99 CLR
362 and Commercial Bank of Australia v Amadio (1983) 151 CLR 447; [1983] HCA 14. In
the case of Blomley v Ryan (1956), Blomley entered into a contract to purchase a farm from
Ryan. Ryan was 78 and was suffering the effects of prolonged and excessive consumption
of alcohol.
This is, I think, not so much because intoxication is a self-induced state and a
reprehensible thing, but rather because it would be dangerous to lend any
countenance to the view that a man could escape the obligation of a contract by
simply proving that he was "in liquor" when it was made.
Mere drunkenness will not permit a person to get out of a contract. However, where
one party was to the knowledge of the other seriously affected by drink, equity will
refuse specific performance. In addition, if a court is satisfied a contract disadvantageous to
the party affected has been obtained by "drawing him in to drink", or that there has been real
unfairness in taking advantage of his condition, the contract may be set aside. Other factors
that may induce equity to refuse relief include
poverty or need of any kind, sickness, age, sex, infirmity of body or mind,
drunkenness, illiteracy or lack of education, lack of assistance or explanation where
assistance or explanation is necessary. The common characteristic seems to be that
they have the effect of placing one party at a serious disadvantage vis-a-vis the
other.
Inadequacy of consideration will be relevant but not determinative. In cases like this
where intoxication is the main disadvantage relied upon, the adequacy of consideration is
particularly important. In this case, the sale price was significantly below market price the
only explanation for this was that Ryan was old and impaired by habitual drinking to excess
and who contracted during a bout of heavy drinking rendering him utterly incapable of
forming a rational judgment about the terms of any business transaction. Although contract
were made freely from consent of both parties, the contract is voided due to the condition of
Ryan which could not make a rational thinking when he was in a state of hangover, and he
was taken an unfair advantage by his agent Blomley to buy his farm in a lower price. Specific
performance and damages were, therefore, denied. The result protected Ryan from
disadvantages by escaping out from the contract due to unconscionability.
One last case that will be discussed here is the case of 1983, Commercial Bank of
Australia v Amadio. The respondents, Mr and Mrs Amadio, executed a guarantee and
mortgage (as security for the guarantee) in favour of the appellant bank. The purpose was to
guarantee debts of their son's (Vicenzo Amadio's) company. Mr and Mrs Amadio were Italian
migrants in their 70's, with limited English skills, little formal education and limited (in the
case of Mr Amadio) or no (in the case of Mrs Amadio) business experience. Mr. and Mrs.
Amadio stood as guarantors against their sons loan for his construction business from the
Commercial Bank of Australia. The bank manager, Mr. Virgo, who was in close
communication with the son, Vincenzo Amadio, had better understanding of the business
reality and knew that the son had probably misrepresented facts in a bid to get his parents to
stand as guarantors. Subsequently, when Vincenzo Amadios business failed, the bank was
required to enforce the guarantee by mortgaging the building owned by Amadios. At trial the
judge found that, at the time of signing the document, the Amadio's believed that liability was
limited to $50,000 and for a period of six months, which pointed out to be not true by Mr.
Virgo. The bank too did not inform the Amadios that there was no limit on their liability as
guarantors. This belief was induced by their son's representations and, the trial judge found,
they would not have signed the document had they known its true effect. The Respondents
allege that the mortgage was procured as a result of unconscionable dealing: the
Respondents were in a disadvantageous position because of their lack of English skills and
old age, and the Appellant used this in order to procure an unfair contract.
On the issue of unconscionable conduct, Justice Mason stated that:
... relief on the ground of "unconscionable conduct" is usually taken to refer to the
class of case in which a party makes unconscientious use of his superior position or
bargaining power to the detriment of a party who suffers from some special disability
or is placed in some special situation of disadvantage ...
... if A having actual knowledge that B occupies a situation of special disadvantage
in relation to an intended transaction, so that B cannot make a judgment as to what is
in his own interests, takes unfair advantage of his (A's) superior bargaining power or
position by entering into that transaction, his conduct in so doing is unconscionable.
And if, instead of having actual knowledge of that situation, A is aware of the
possibility that that situation may exist or is aware of facts that would raise that
possibility in the mind of any reasonable person, the result will be the same.
The knowledge of Mr Virgo was the knowledge of the bank. Whether we treat Mr.
Virgo as having knowledge of the possibility already discussed or as having
knowledge of facts which would raise that possibility in the mind of any reasonable
person the inevitable conclusion is that the bank was guilty of unconscionable
conduct by entering into the transaction without disclosing such facts as may have
enabled the respondents to form a judgment for themselves and without ensuring
that they obtained independent advice.
From this, the Appellant has acted unconscionably by taking advantage of the
Respondents' clear inability to make a proper judgment. Misrepresentation could be a part
for the cause of unconscionability. There is a lot of mistakes made by the parties for not
giving out real information when signing the contract. Mr. Virgo wanted to mortgage the
building may be not wrong because it was stated in the contract that he could do it once
terms and conditions applied. Although there is an agreement, but this agreement comes
with lacking of true information and independent advice for the Respondents to make a
contract. Therefore, the contract is rescinded. Both of the cases from Australia Blomley v
Ryan (1956) 99 CLR 362 and Commercial Bank of Australia v Amadio (1983) 151 CLR
447; [1983] HCA 14 are some of the development of doctrine of unconsionability being put
into practiced, and it has clearly shown that it contravenes with the freedom of contract by
not considering the consents made by both the Appellant and the Respondents.
It is said that the doctrine of unconscionability granted relief to a much greater extent
than common law's non est factum, duress, misrepresentation and mistake as well as the
equitable doctrine of undue influence. This evolution of new doctrines and approaches in
English law has to a certain degree influenced the development of Malaysian contract law. It
should be noted that the development of the doctrine is also influenced by the development
of the contractual theory. As JR Peden stated:
The history of unconscionable contracts provides a useful focus for tracing the
general development of contract theory, and in particular the ongoing conflict
between freedom of contract and the desire for fairness.
In freedom of contract, the only function of law is to enforce contract that was entered
into freely and voluntarily. This led into a detrimental effect over the development or growth
of the doctrine of unconscionability. According to JR Peden, the doctrine of unconscionability
does not require proof of consent, which is material under the consensual theory of freedom
of contract. Even though unconscionability manifested the external indicia of free consent, it
was not so easy to reconcile with freedom or sanctity of contract.
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. Even though the purpose of the doctrine is different from freedom of contract, it
contributes towards ensuring security of the contract.
As a conclusion, doctrine of unconscionability contravene with the freedom of
contract in term of consents made for an agreement to be enforced by law. Sometimes, the
doctrine could not stand for real justice as it also depends on the facts of each cases, which
would still lead to unfairness, and if it is due to greed of the stronger party that claimed that it
is a weaker party, there would be much distress of unjustness and inequality done to the
real weaker parties that could not defend themselves. As quoted by a politician, Barry
Goldwater, I would remind you that extremism in the defence of liberty is no vice. And let
me remind you also that moderation in the pursuit of justice is no virtue. This is an
interesting thought to be pondered upon whether extremism is always not good, and whether
fairness is always a virtue to all mankind, which relates to how far and how just that
doctrine of unconscionability can be utilized in solving cases in Malaysia.
(4000 words)

References
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