D. Unconscionability
| Author | John D. McCamus |
| Profession | Professor of Law. Osgoode Hall Law School, York University |
| Pages | 404-424 |
Page 404
In addition to the jurisdiction to set aside agreements resulting from abuse of confidential relationships on the basis of the doctrine of undue influence, courts of equity asserted a jurisdiction to set aside agreements where, even in the context of bargaining by complete strangers, unfair agreements resulted from an inequality of bargaining power. In Waters v. Donnelly,189Chancellor Boyd described the jurisdiction in the
Page 405
following terms: "[I]f two persons, no matter whether a confidential relationship exists between them or not, stand in such a relation to each other that one can take an undue advantage of the other, whether by reason of distress, or recklessness, or wildness, or want of care, and when the facts shew that one party has taken undue advantage of the other by reason of the circumstances I have mentioned, a transaction resting upon such unconscionable dealing will not be allowed to stand."190Where such circumstances are present, "the principle is applied of requiring the one who gets the benefit to prove that the transaction was fair, just and reasonable."191The facts of this case are illustrative. The parties apparently had no relationship prior to the negotiation of the impugned transaction. The plaintiff, a young and unsophisticated man who was not a business person and who was described as being "weak-minded and very easily led,"192was persuaded by the defendant, a shrewd business person, to trade his Niagara peach orchard and seven hundred dollars in return for the defendant’s livery stable. The transaction rested on a substantial exaggeration of the value of the defendant’s property. Moreover, it included a mortgage obligation that the plaintiff was unlikely to have fully understood. The plaintiff was "over-matched and overreached; without information, and without advice he made a most improvident exchange."193The transaction was set aside. Although the term "fraud," is often used in these cases to refer to the defendant’s conduct, it is clearly established, as Chancellor Boyd noted,194that it is not necessary to establish that fraud in the common law sense of deceit must have occurred. The elements of the doctrine articulated by Chancellor Boyd establish a form of "equitable" or "constructive" fraud.
Although this doctrine of unconscientious dealing or, as it is now more commonly described, unconscionability is applicable to dealings between complete strangers, it may also apply to dealings between parties that have a pre-existing relationship. Thus, it may occur that in a particular fact situation consideration may be given to whether either one or both of the doctrines of undue influence and unconscionability
Page 406
might apply. Nonetheless, the doctrines have separate and discrete functions. In a leading case, Morrison v. Coast Finance Ltd.,195Davey J.A. outlined the difference between the two doctrines in the following terms:
The equitable principles relating to undue influence and relief against unconscionable bargains are closely related, but the doctrines are separate and distinct. ... A plea of undue influence attacks the sufficiency of consent; a plea that a bargain is unconscionable invokes relief against an unfair advantage gained by an unconscientious use of power by a stronger party against a weaker. On such a claim the material ingredients are proof of inequality in the position of the parties arising out of the ignorance, need or distress of the weaker, which left him in the power of the stronger, and proof of substantial unfairness of the bargain obtained by the stronger. On proof of those circumstances, it creates a presumption of fraud which the stronger must repel by proving that the bargain was fair, just and reasonable ... or perhaps by showing no advantage was taken.196In determining the scope of the doctrine, then, it is necessary to consider the requisite degree of the inequality of bargaining power present in a particular fact situation and the requisite degree of the advantage taken or the unfairness or inprovidency of the transaction. In attempting to discern the scope of the doctrine, it is also necessary to consider whether the doctrine is primarily or, indeed, exclusively, targeted at what has been referred to as problems of "procedural" unconscionability, or whether it may extend to cases of "substantive" unconscionability as well.197If the doctrine is merely procedural in nature, it may apply only to situations in which one of the bargaining parties suffers from a severe inability to engage in effective bargaining. If the doctrine is substantive in nature, however, it might be considered to apply, for example, to transactions entered into by consumers of normal bargaining capacity dealing with commercial actors, such as large corporations, that have a much greater bargaining power. If the doctrine is applicable to oppressive terms contained in ordinary consumer transactions, the doctrine might be thought to constitute an effective means of implementing broad policies of consumer protection. As we shall see, the
Page 407
role of the doctrine at common law as an instrument of such a policy is, at best, a limited one. The doctrine has, however, been given statutory expression in a number of provincial legislative schemes that do implement broadly based policies of this kind.198
In order to set aside a transaction on the ground of unconscionability, one must establish both inequality of bargaining power in the sense that one party is incapable of adequately protecting his or her interests and undue advantage or benefit secured as a result of that inequality by the stronger party. The combination of these two factors is well illustrated in the leading case of Morrison v. Coast Finance Ltd.199The plaintiff was an elderly widow, Mrs. Morrison, preyed upon by two young men, Lowe and Kitely. A woman of modest means, Morrison’s principal income came from renting out three rooms in her home. Kitely had been a roomer for a month or two before he and Lowe successfully persuaded Morrison to mortgage her home to the defendant finance company in order to be able to lend the monies thereby secured to Lowe and Kitely. The monies were to be used by Lowe to repay a loan advanced to him by the same finance company and by the two men to each buy a car from a related automobile company that operated as a car dealer. Kitely was an alcoholic; the two men represented to Morrison that her loan to them would enable Kitely to make a start in the automobile sales business. The transaction was handled by one Crawford, the office manager for both the finance company and the automobile company. Under his supervision, the cheque for the proceeds of the mortgage was endorsed by Morrison in favour of Lowe and Kitely, who in turn returned the cheque to Crawford. Crawford deposited the amount in the account of the automobile company, from which amount the outstanding balance on Lowe’s loan was restored to the finance company. The unfairness of the transaction was no doubt evident to Crawford who, later that day or the next day, required Lowe to execute a promissory note in favour of Morrison for the amount advanced and further, required the execution of conditional sale contracts for the two cars in question between the automobile company and Lowe and Kitely and assigned the vendor’s interest therein to Morrison. As Davey J.A. observed, "[T]he extreme folly of this old woman mortgaging her home in order to borrow money which she could not repay out of her own resources, for the purpose
Page 408
of lending it to the two men, who were comparative strangers, is self-evident."200This was not a simple case of a mortgage being made on the usual terms to a person intending to use the money for his or her own purposes. This was a mortgage designed to put funds into the hands of the finance company and the automobile company by taking advantage of the obvious vulnerability of Morrison. It was "a gross abuse of overwhelming inequality between the parties."201Accordingly, Morrison’s action to have the mortgage set aside on the ground that it constituted an unconscionable bargain enjoyed success.
Many of the unconscionability cases deal with situations in which the inequality of bargaining power arises from the mental infirmities that may come with advancing years.202In other cases, such as Waters v. Donnelly,203the inequality results from a lack of intelligence or education coupled with a lack of sophistication in business matters.204
A more recent illustration is provided by Harry v. Kreutziger.205In this case, the plaintiff sought to set aside the sale of his fishing boat to the defendant at a price of approximately four thousand dollars. The boat, with its salmon fishing licence, was worth approximately sixteen thousand dollars. The plaintiff was a "mild, inarticulate, retiring person ... not widely experienced in business matters."206He was "partially deaf, easily intimidated and ill-advised."207Although initially reluctant to sell the boat, the defendant induced him into the sale by a "process of harassment"208to which he ultimately succumbed. Quite apart from the underevaluation of the boat, the plaintiff failed to appreciate the extreme difficulty he might encounter in attempting to get another fishing licence. For his part, the defendant pursued the transaction aggressively and with full knowledge of the true value of the boat. The British Columbia Court of Appeal held that the transaction was obviously im-provident and that it resulted from the inequality of bargaining power
Page 409
between the parties. Other signals of inequality of bargaining power include emotional distress,209illiteracy,210inability to...
To continue reading
Request your trial