5. UNCONSCIONABILITY
1. BACKGROUND
It’s a central pillar of the common law’s conception of freedom of contract that the courts will not intervene in order
simply to save a person from an improvident bargain which he has freely made. The attitude of equity has, as ever, been
less rigid than that of the common law, and there are limited circumstances in which equity will relieve a party from a
disadvantageous bargain notwithstanding that his assent has been given without the freedom-diminishing taint of
misrepresentation, mistake, duress or undue influence. In the words of Treital: “Equity can give relief against
unconscionable bargains in certain cases in which one party is in a position to exploit a particular weakness of the other.
The burden of justifying such a transaction is on the former party.”
2. UNCONSCIONABILITY IN EQUITY
Commercial Bank of Australia Ltd v Amadio (1983)
Facts Amadio was the managing director of a construction company that was in financial trouble. The defendant
bank discontinued the company’s overdraft facilities, but undertook to restore and extend them upon
obtaining additional security in the form of a guarantee from his parents secured by a mortgage over their
house. Amadio’s parents were elderly pensioners who spoke Italian but knew little English. He asked his
parents to execute the documents, telling them that they were valid for only six months with an upper limit
of A$50,000. In fact, they were not limited as to time and were not subject to an upper limit in terms of the
amount secured. The bank’s manager (Mr Virgo) attended the signing of the documents at the parents’
home, where Amadio’s father made remarks indicating that he did not properly appreciate the extent of his
potential liability. The parents signed without receiving any independent advice. The position of Amadio’s
company continued to deteriorate, and the bank called upon the elderly couple to honour their guarantee
in the amount of A$240,000. The Amadio’s sought to have the guarantee and mortgage set aside on the
grounds of unconscionable conduct by the bank. Their claim was dismissed at first instance but upheld
before the Full Court of the Supreme Court of South Australia. The Bank brought this further appeal to the
High Court of Australia.
Issue Whether the agreement could be set aside on the grounds on unconscionable conduct.
Held The respondents were entitled to an order setting aside the mortgage guarantee & the appeal was dismissed
Rule “… (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 facile unfair or ‘unconscientious’
that he procure, or accept, the weaker party’s assets 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”
Reason Requirement 1 – Party to a transaction was under a special disability: The parents were Italians of advanced
years, aged 76 and 71 respectively, having a limited command of written English and no experience of
business in the field or at the level in which their son and the company engaged.
Requirement 2 – Stronger party knew of the weaker party’s disability: Mr Virgo was aware that the
respondents were Italians, that they were of advanced years and that they did not have a good command
of English. He knew that Vincenzo had procured their agreement to sign the mortgage guarantee.
Requirement 3 – Stronger party takes advantage of the weaker party’s disability: Mr Virgo also knew that,
in the light of the then financial condition of the company, I twas vital to Vincenzo to secure his parents’
signature to the mortgage guarantee so that the company could continue in business. It must have been
obvious to Mr Virgo, as to anyone else having knowledge of the facts, that the transaction was improvident
from the viewpoint of the respondents. In these circumstances it is inconceivable that the possibility did not
occur to Mr Virgo that the respondents’ entry into the transaction was due to their inability to make a
judgment as to what was in their best interest, owing to their reliance on their son, whose interest would
inevitably incline him to urge them to sign the instrument put forward by the bank.
As Mason J and Deane J made clear in Amadio, unconscionability in equity cannot be established merely on the basis that
the parties were of unequal bargaining power. Much more than that is required. In particular, three requirements may
be distilled from their judgments:
Chloe T 26
, 1. The weaker party was labouring under a disability, condition or circumstance that seriously affected his ability to
make judgment as to his own best interests,
2. The stronger party knew or ought to have known of the existence of that disability, condition, or circumstance and
of its effect on the weaker party, and
3. The stronger party exploited the disability, condition or circumstance in extracting from the weaker party, the latter’s
consent to an unconscientious bargain. Of particular relevance is whether there were any benefits to the weaker
party; the more disadvantageous the transaction to the weaker party and the more advantageous to the stronger,
the more likely ti will be that it was unconscionable for the stronger party to take advantage of the weaker party’s
disability, condition or circumstance.
Boustany v Pigott (1995)
Facts Miss Pigott leased a property to Boustany. Miss P’s affairs were managed by her brother, George P, since
she was “quite slow”. When George P was away, Miss P got a lawyer to draw up a new lease at a much
higher rent and although the lawyer warned her that it would not be in her interest to sign, she insisted on
doing so. Miss P wanted to set aside the new lease as an unconscionable bargain.
Held The Privy Council allowed for the lease to be set aside
Reason 1. It is not sufficient to attract the jurisdiction of equity to prove that a bargain is hard, unreasonable or
foolish; it must be proved to be unconscionable, in the sense that ‘one of the parties to it has imposed
the objectionable terms in a morally reprehensible manner, that is to say, in a way which affects his
conscience
2. ‘Unconscionable’ related not merely to the terms of the bargain but the behaviour of the stronger party,
which must be characterised by some moral culpability or impropriety
3. Unequal bargaining power or objectively unreasonable terms provide no basis of requitable
interference in the absence of unconscientious or extortionate abuse of power where exceptionally,
and as a matter of common fairness, ‘it was not right that the strong should be allowed to push the
weak to the wall’
4. A contract cannot be set aside in equity as ‘an unconscionable bargain’ against a party innocent of actual
or constructive fraud. Even if the terms of the contract are ‘unfair’ in the sent that they are more
favourable to one party than the other (‘contractual imbalance’) equity will not provide relief unless
the beneficiary is guilty of unconscionable conduct.
5. ‘In situations of this kind it is necessary for the plaintiff who seeks relief to establish unconscionable
conduct, namely that unconscientious advantage has been taken of this disabling condition or this
disabling condition or circumstances’
Therefore, there are four requirements in finding an unconscionable bargain:
1) The party seeking relief is at a serious disadvantage because of some weakness or disability
2) Stronger party acted “badly” in taking wrongful advantage of this weakness
3) Terms of the contract are unfair
4) Weaker party did not have independent legal advice.
Lo Wu v Cheung Chan Ka Joseph (2001)
Facts The plaintiffs were elderly sisters living in a remote part of mainland China. The second defendants were
Hong Kong property developers who wished to acquire property, a half share in which had been inherited
by the plaintiffs. Th developer’s representatives had persuaded the plaintiffs to assign their half share to the
developer for $87,000 not mentioning that they had acquired the other half share for $2.4 million. Another
representative had also been chosen as the plaintiffs’ attorney. One year later, when the developer sought
to pay the balance of the purchase money, the plaintiffs, now cognisant of the undervaluation of their share,
refused to accept the balance and sought to have the contract set aside on the basis of unconscionability.
Held Claim was upheld at first instance and on appeal
Reason The elements that appear to have weighed most heavily in the court’s determination that the defendants’
conduct constituted operative unconscionability were:
1. The disability of the plaintiffs in the form of their lack of sophistication and experience combined with
their advanced ages;
2. The vastly greater experience and sophistication of the defendants;
3. The enormous disparity between the price being offered to the plaintiffs and to other vendors in a
similar position;
4. False and misleading statements made by the defendants in order to secure their agreement;
5. The unfair tactic of literally dangling cash in front of the plaintiffs to entice their agreement
Chloe T 27
1. BACKGROUND
It’s a central pillar of the common law’s conception of freedom of contract that the courts will not intervene in order
simply to save a person from an improvident bargain which he has freely made. The attitude of equity has, as ever, been
less rigid than that of the common law, and there are limited circumstances in which equity will relieve a party from a
disadvantageous bargain notwithstanding that his assent has been given without the freedom-diminishing taint of
misrepresentation, mistake, duress or undue influence. In the words of Treital: “Equity can give relief against
unconscionable bargains in certain cases in which one party is in a position to exploit a particular weakness of the other.
The burden of justifying such a transaction is on the former party.”
2. UNCONSCIONABILITY IN EQUITY
Commercial Bank of Australia Ltd v Amadio (1983)
Facts Amadio was the managing director of a construction company that was in financial trouble. The defendant
bank discontinued the company’s overdraft facilities, but undertook to restore and extend them upon
obtaining additional security in the form of a guarantee from his parents secured by a mortgage over their
house. Amadio’s parents were elderly pensioners who spoke Italian but knew little English. He asked his
parents to execute the documents, telling them that they were valid for only six months with an upper limit
of A$50,000. In fact, they were not limited as to time and were not subject to an upper limit in terms of the
amount secured. The bank’s manager (Mr Virgo) attended the signing of the documents at the parents’
home, where Amadio’s father made remarks indicating that he did not properly appreciate the extent of his
potential liability. The parents signed without receiving any independent advice. The position of Amadio’s
company continued to deteriorate, and the bank called upon the elderly couple to honour their guarantee
in the amount of A$240,000. The Amadio’s sought to have the guarantee and mortgage set aside on the
grounds of unconscionable conduct by the bank. Their claim was dismissed at first instance but upheld
before the Full Court of the Supreme Court of South Australia. The Bank brought this further appeal to the
High Court of Australia.
Issue Whether the agreement could be set aside on the grounds on unconscionable conduct.
Held The respondents were entitled to an order setting aside the mortgage guarantee & the appeal was dismissed
Rule “… (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 facile unfair or ‘unconscientious’
that he procure, or accept, the weaker party’s assets 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”
Reason Requirement 1 – Party to a transaction was under a special disability: The parents were Italians of advanced
years, aged 76 and 71 respectively, having a limited command of written English and no experience of
business in the field or at the level in which their son and the company engaged.
Requirement 2 – Stronger party knew of the weaker party’s disability: Mr Virgo was aware that the
respondents were Italians, that they were of advanced years and that they did not have a good command
of English. He knew that Vincenzo had procured their agreement to sign the mortgage guarantee.
Requirement 3 – Stronger party takes advantage of the weaker party’s disability: Mr Virgo also knew that,
in the light of the then financial condition of the company, I twas vital to Vincenzo to secure his parents’
signature to the mortgage guarantee so that the company could continue in business. It must have been
obvious to Mr Virgo, as to anyone else having knowledge of the facts, that the transaction was improvident
from the viewpoint of the respondents. In these circumstances it is inconceivable that the possibility did not
occur to Mr Virgo that the respondents’ entry into the transaction was due to their inability to make a
judgment as to what was in their best interest, owing to their reliance on their son, whose interest would
inevitably incline him to urge them to sign the instrument put forward by the bank.
As Mason J and Deane J made clear in Amadio, unconscionability in equity cannot be established merely on the basis that
the parties were of unequal bargaining power. Much more than that is required. In particular, three requirements may
be distilled from their judgments:
Chloe T 26
, 1. The weaker party was labouring under a disability, condition or circumstance that seriously affected his ability to
make judgment as to his own best interests,
2. The stronger party knew or ought to have known of the existence of that disability, condition, or circumstance and
of its effect on the weaker party, and
3. The stronger party exploited the disability, condition or circumstance in extracting from the weaker party, the latter’s
consent to an unconscientious bargain. Of particular relevance is whether there were any benefits to the weaker
party; the more disadvantageous the transaction to the weaker party and the more advantageous to the stronger,
the more likely ti will be that it was unconscionable for the stronger party to take advantage of the weaker party’s
disability, condition or circumstance.
Boustany v Pigott (1995)
Facts Miss Pigott leased a property to Boustany. Miss P’s affairs were managed by her brother, George P, since
she was “quite slow”. When George P was away, Miss P got a lawyer to draw up a new lease at a much
higher rent and although the lawyer warned her that it would not be in her interest to sign, she insisted on
doing so. Miss P wanted to set aside the new lease as an unconscionable bargain.
Held The Privy Council allowed for the lease to be set aside
Reason 1. It is not sufficient to attract the jurisdiction of equity to prove that a bargain is hard, unreasonable or
foolish; it must be proved to be unconscionable, in the sense that ‘one of the parties to it has imposed
the objectionable terms in a morally reprehensible manner, that is to say, in a way which affects his
conscience
2. ‘Unconscionable’ related not merely to the terms of the bargain but the behaviour of the stronger party,
which must be characterised by some moral culpability or impropriety
3. Unequal bargaining power or objectively unreasonable terms provide no basis of requitable
interference in the absence of unconscientious or extortionate abuse of power where exceptionally,
and as a matter of common fairness, ‘it was not right that the strong should be allowed to push the
weak to the wall’
4. A contract cannot be set aside in equity as ‘an unconscionable bargain’ against a party innocent of actual
or constructive fraud. Even if the terms of the contract are ‘unfair’ in the sent that they are more
favourable to one party than the other (‘contractual imbalance’) equity will not provide relief unless
the beneficiary is guilty of unconscionable conduct.
5. ‘In situations of this kind it is necessary for the plaintiff who seeks relief to establish unconscionable
conduct, namely that unconscientious advantage has been taken of this disabling condition or this
disabling condition or circumstances’
Therefore, there are four requirements in finding an unconscionable bargain:
1) The party seeking relief is at a serious disadvantage because of some weakness or disability
2) Stronger party acted “badly” in taking wrongful advantage of this weakness
3) Terms of the contract are unfair
4) Weaker party did not have independent legal advice.
Lo Wu v Cheung Chan Ka Joseph (2001)
Facts The plaintiffs were elderly sisters living in a remote part of mainland China. The second defendants were
Hong Kong property developers who wished to acquire property, a half share in which had been inherited
by the plaintiffs. Th developer’s representatives had persuaded the plaintiffs to assign their half share to the
developer for $87,000 not mentioning that they had acquired the other half share for $2.4 million. Another
representative had also been chosen as the plaintiffs’ attorney. One year later, when the developer sought
to pay the balance of the purchase money, the plaintiffs, now cognisant of the undervaluation of their share,
refused to accept the balance and sought to have the contract set aside on the basis of unconscionability.
Held Claim was upheld at first instance and on appeal
Reason The elements that appear to have weighed most heavily in the court’s determination that the defendants’
conduct constituted operative unconscionability were:
1. The disability of the plaintiffs in the form of their lack of sophistication and experience combined with
their advanced ages;
2. The vastly greater experience and sophistication of the defendants;
3. The enormous disparity between the price being offered to the plaintiffs and to other vendors in a
similar position;
4. False and misleading statements made by the defendants in order to secure their agreement;
5. The unfair tactic of literally dangling cash in front of the plaintiffs to entice their agreement
Chloe T 27
