UNCONSCIONABILITY IN CONTRACTS

THE

MODERN LAW REVIEW Volume 39 July 1976 No.4

UNCONSCIONABILITY IN CONTRACTS “ There is the vigilance of the common law which, while allowing

freedom of contract, watches to see that it is not abused.”

INTRODUCTION Several generations of common lawyers have been educated in the belief that the common law of contract admits no relief from contractual obligations on grounds of unfairness, or inequality of exchange.2 The rule might seem hard, it is said, in an individual case, but it is justified by the need for certainty and commercial stability, for ‘‘ the Chancery mends no man’s bargain.” a

My view is that the law of contract, when examined for what the judges do, as well as for what they say.’ shows that relief from contractual obligations is in fact widely and frequently given on the ground of unfairness, and that general recognition of this ground of relief is an essential step in the development of the law.

The law of contract, like thc legal system itself, involves a balance between competing sets of values. Freedom of contract emphasises the need for stability, certainty, and predictability. But, important as these values are, they are not absolute, and there comes a point where they “ face a serious challenge.” Against them must be set the value of protecting the weak, the foolish, and the thoughtless from imposition and oppression. Naturally, at a particular time, one set of values tends to be emphasised at the expense of the other. We have just passed through a period in which the values of Certainty and predictability in contract law have been emphasised over all others, and we now seem

1 Denning J. in John Lee & Son (Granfham) Lfd . v. Railway Executive [1949] 2 All E.R. 581, 584. 2 See e.g. Cheshire and Fifoot, Law of Conrracf, 8th ed., p. 69.

8 Lord Nottingham in Maynard v. Mosely (1676) 3 Swanst. 651, 655. But Powell on Conrracfs (1790) has a long chapter entitled “ Of the Equitable Jurisdiction in relieving against unreasonable contracts or agreements.”

1 Lord Diplock has suggested that one should look at what the judges said in the light of what they did, see p. 389, infra.

5 The phrase was used by Palmer, Misfake and Unjusf Enrichment, 37. The problems of mistake and frustration also involve cnses where contract values arc outweighed by another set of values, namely the values that favour restitution of benefits conferred by mistake. The word “ unconscionable ” might possibly be applied to these cnses as, indeed, to cases of fraud, misrepresentation, estoppel, and inequitable conduct in general. But such a broad use deprives the word of specific meaning. This article is concerned only with cases where the terms of an agreement are thcmselves unfair.

369 VOL. 39 (4) 1

370 THE MODERN LAW REVIEW [Vol. 39

to be entering a period in which opposing values are beginning to reassert themselves. I would maintain, however, that even at a time when the judges, by their words, refused to countenance any breach in the notion of sanctity of contracts, relief was, in practice, frequently afforded. For no civilised system of law can accept the implications of absolute sanctity of contractual obligations.

FORFEITURES The equitable relief given by the Court of Chancery against forfeitures of various kinds seems to be the earliest example of the courts’ refusal to enforce contractual obligations, however clearly and unequivocally expressed.

The cases on mortgages show the repeated, but unsuccessful. attempts of mortgagees to draft their documents in such a way as to achieve the quite simple result they wanted, that is. forfeiture of the land on the mortgagor’s default. The Courts of Chancery consistently refused to enforce this result. Whatever form of words was used, even if the conveyance was on its face absolute, with a collateral promise to reconvey> the court, if convinced that the conveyance was, in substance, made as security, treated the transaction as a mortgage and permitted the mortgagor to redeem.’

There can, surely, be no doubt that this equitable jurisdiction amounted to a direct interference with freedom of contract.s In Howard v. Harris the court said:

“ So in every mortgage the agreement of the parties upon the face of the deed, seems to be, that a mortgage shall not be redeemable after forfeiture. . . and a mortgage can no more be irredeemable, than a distress for rent-charge can be irrepleviable. The law itself will control that express agreement of the party; and by the same reason equity will let a man loose from his agreement, and will against his agreement permit him to redeem a mortgage.”

The reason for this interference was suggested in Vernon v. Bethell: “ The court, as a court of conscience, is very jealous of persons taking securities for a loan, and convcrting such securities into purchases. And therefore I take it to be an established rule that a mortgagee can never provide at the time of making the loan for any event or condition on which the equity of redemption shall be discharged, and the conveyance absolute. And there is great reason and justice in this rule, for necessitous men are not. truly speaking, free men, but, to answer a present exigency, will submit to any terms that the crafty may impose upon them.” lo

In other cases the agreements struck down were described as “ unreasonable ” l1 and “ unconscionable.” l2

0 Mmdove v. Bale (1688) 2 Vcm. 84. 7 See Turner, The Equiry of Redemptiotz (1931). 9 (1683) 1 Vern. 191, 192.

8 Ibid. p. 175. 10 (1762) 2 Eden 110, 113.

11 ‘Talbor v. Braddilt (1683) 1 Vcm. 183 and 394. 12 Jetiriings v. Ward (1705) 2 Vcm. 520.

July 19761 UNCONSCIONABILITY IN CONTRACTS 371

Though, no doubt, unreasonableness and unconscionability were the original bases for the court’s interference, the jurisdiction of the court eventually became over-rigid. In an age when courts were reluctant to admit as a controlling factor any notion so vague as reasonableness or fairness. it was easier. intellectually, to accept a rigid rule without apparent rational basis, than a general power of control. Ironically, this rigidity led eventually to the striking down of agreements that were quite fair and reasonable. This curious result is illustrated in every branch of the law discussed in this article. Failure to recognise a general principle of unconscionability results not only in the enforcement of agreements that ought not to be enforced, but in the striking down of agreements that ought to be upheld. In the present context the illustration is the control of mortgagees’ attempts to restrict the equity of redemption. The early principle that such restrictions should be struck down because unconscionable. grew into a rigid rule that the mortgagee could stipulate for no collateral advantage of any sort. In an age where the mortgagor was frequently no longer a private landowner, but a commercial company with access to advice and bargaining power equal to that of the mortgagee, the rule against collateral advantages had anomalous results. In Samuel V. Jarrah Timber Co. Lord Halsbury was moved to say with some irritation : ‘‘ A perfectly fair ,bargain made between two parties to it, each of whom was quite sensible as to what they are doing, is not to be performed because at the same time a mortgage arrangement was made between them.” la And Lord Macnaghten said :

“Having regard to the state of the authorities binding on the Court of Appeal if not on this House, it seems to me that they could not have come to any other conclusion, although’ the transaction was a fair bargain between men of business without any trace or suspicion of oppression surprise or circumvention . . .” l4

In Kreglinger V. New Patagonia Meat and Cold Storage Co. Ltd. the House of Lords finally reestablished the principle that had originally justified the court’s interference with mortgage agreements. Lord Haldane said :

L L It was, in ordinary cases, only where there was conduct which the Court of Chancery regarded as unconscientious that it interfered with freedom of contract. The lending of money, on mortgage or otherwise, was looked on with suspicion, and the court was on the alert to discover want of conscience in the terns imposed by lenders. . . . It is inconsistent with the objects for which {the rules of equity] were established that these rules should crystallise into technical language so rigid the letter can defeat the underlying spirit and purpose.” lS

“My Lords, the defendants in this case are appealing to the equitable jurisdiction of the court for relief from a contract which

1s 119141 A.C. 25, 36 and 37-38.

Lord Parker said:

15 [1904] A.C. 323, 325. 1 4 Ibid.


they admit to be fair and reasonable and of which they have already enjoyed the full advantage. , . . In every case in which a stipulation by a mortgagee for a collateral advantage has, since the repeal of the usury laws, becn held invalid, the stipulation has been open to objection either (1) because it was unconscionable, or (2) because it was in the nature of a penal clause clogging the equity arising on failure to exercise a contractual right to redeem, or (3) because it was in the nature of a condition repugnant as well to the contractual as to the equitable right.” lo

This line of cases suggests to me that freedom of contract is best preserved, not by denying the court’s power to relieve for unconscionability, but by openly recognising it.

Equity relicved also against forfeiture of leases. Again, the underlying principle is similar. The landlord had parted with his land for the term of the lease. The retention of a right of re-entry for nonpayment of rent, whatever the form of words used1? was, in substance, a security device, and, as in the case of a mortgagee, sthe landlord is not to be allowed to insist on forfeiture when he can be compensated by payment of the rent (with interest and costs). Lord Erskine said :

“ There is no branch of the jurisdiction of this court more delicate than that, which goes to restrain the exercise of a legal right. That jurisdiction rests only upon this principle; that one party is taking advantage of a forfeiture; and as a rigid exercise of the legal right would produce a hardship, a great loss and injury on the one hand arising from going to the full extent of the right, while on the other the party may have the full benefit of the contract as originally framed, the court will interfere; where a clear mode of compensation can be discovered. Of this nature is the case, that constantly occurs, confirmcd by statute. . . giving a more ready mode of relief at law: a contract to pay rent with a covenant and clause of re-entry for breach. The obvious intention is to secure the payment of the rent. . . . In that case equity is in the constant course of relieving the tenant . . . and upon the payment of the rent and all expenses will not permit the tenant to be turned out of possession; considering that in the one case frequently great hardship might be the consequence; in the other, the party being placed in the same position, there is in general no hardship.”

Even the common law courts would stay proceedings in ejectment if the rent were paid at any time before execut i~n .~~ Courts of equity would also give relief against forfeiture for breach of other covenants than payment of rent when convinced that adequate compensation ~ ~~~

10 Ibid. pp. 46 and 56. See also Knightsbridge Estates Trust Ltd. V. Byrne [19391

17 Even if the lease was stated to be “ void ” on non-payment of rent, Bowser v.

18 Sunders v. Pope (1806) 12 Ves. 282, 289. 19 Phillips v. Doelitfle (1725) 8 Mod. 345.

ch. 441.

Cdby (1841) 1 Hare 109.


could be made to the lessor for the breach.20 The power of the court to relieve against forfeiture of land in other cases than mortgages and leases was affirmed recently in the House of Lords.21 One recent case suggests that perhaps the jurisdiction may apply to leases of chattels a well as of land.22

PENALTIES Forfciture in its various forms has obvious advantages to the secured party, and it is not surprising that attempts were made by those in a position to do so. to extend the benefits of forfeiture to other sorts of contractual obligation than leases and mortgages. The growth of the penal bond represented an attempt to secure the advantages of forfeiture without the immediate transfer of the propcrty to be forfeited. A common form of the bond was a covenant to pay a fixed sum of money unless some other act was performed by a certain date.2s The effect was to secure the performance of the other act, which might itself be the payment of a sum of money.

Where the effect of the bond was to secure performancc of an act (even though the performance might not itself be promised 24) the court of equity gave relief to the obligor on much the same principle as in cases of mortgages and leases. Rigby L.J. said in 1900:

“ The Court of Chancery gave relief against the strictness of the common law in cases of penalty or forfeiture for nonpayment of a fixed sum on a day certain, on the principle that failure to pay principal on a certain day could be compensated sufficiently by payment of principal and interest with costs at a subsequent day.” 25

In 1880, Bramwell L.J., though not himself as he said entirely sympathetic with the principle, described the relief as follows :

“ [Having described the lessee’s relief against forfeiturc]. . . . In other cases the Court of Chancery said that a penalty to secure the payment of a sum of money or the performance of an act should not be enforced; the parties were not held to their agreement; equity in truth refused to allow to be enforced what was considered to be an unconscientious bargain.” 2o

As in other areas of the law discussed in this paper, the courts and commentators have attempted to minimise the extent to which control over penalty clauses involves control over agreement. Thus, the law relating to penalty clauses is usually presented in the books as a part of the law of remedies, rather than enforceability. There are reasons

~ ~~

20 Davis v. West (1806) 12 Ves. 475. But in Green v. Bridges (1830) 4 Sim. 96

21 Shiloh Spinners Ltd. v. Harding [ 19731 A.C. 691. 22 Barton Thompson & Co. v. Stapling Machines Co. [1966] Ch. 499, 509. 23 See Corbin. Confracts, 1056. 24 IMd. And sce Lord Dcnning’s speech in Bridge V. Campbell Discount Co. Lid.

25 In Re Dixon, Heynes V. Dixon [1900] 2 Ch. 561, 576. 20 Protector Loan Co. V. Grice (1880) 5 Q.B.D. 592, 596.

relief was refused against forfeiture for breach of n covenant to insure.

119621 A.C. 600, 630.


of convenience that may justify this approach, but, as Corbin wrote, there can be no doubt that in relieving against penalty clauses. the courts are limiting the freedom of c~ntract.~'

I would maintain that the underlying criterion of enforceability in this area is, and must eventually be recognised to be, the fairness of the provision sought to be enforced. The courts. however, here as elsewhere, have retreated from the recognition of so vague a test, and have resorted instead to a supposed distinction between penal clauses held " in terrorem " over the obligor and " genuine pre-estimates " liquidating damages for breach. This distinction, however, hardly works satisfactorily. First, enforceable liquidated damages agreements do, in general, operate to induce performance of another obligation, and certainly one of the motives affecting the obligor will be, and is expected to be, the fear of having to pay the agreed sum on default.= On thc other hand, a penalty (which the courts will strike down) may, as Lord Radcliffe said, not be in the least terrifyingm In practice. I would suggest, the courts have not applied the distinction. Take, for example, what is generally cited as the leading case, Dunlop Pneumatic Tyre Co. Lid. v. New Garage and Motor Co. Ltd.P0 where the obligor agreed to pay the sum of €5 for each sale in breach of any one of a number of widely differing obligations, including maintenance of resale prices, and the withholding of supplies from certain named persons?I The agreement was enforced, rightly I believe, given the attitude of the time to restrictive trade practices. But I am doubtful that the sum of €5 can reasonably be described as a genuine pre-estimate of the damage that the Dunlop company was likely to suffer on sales made in contravention of its rules. The purpose of the provision can hardly be other than to induce compliance with the restrictive rules by fear of otherwise being obliged to pay the agreed sum. Surely the true reason for enforcement must be that in the circumstances the agreement was not an unreasonable one. And an examination of the specches shows, I think, that the idea of reasonableness was firmly in the minds of the Law Lords. Lord Dunedin used the words " extravagant and unconscionable." Lord Atkinson said : " I agree . . . that on the face of it on this point of liquidated damages it contains nothing unreasonable, unconscionable, or extravagant." Lord Parmoor added : " In the present case the definite sum agreed

27 Corbin, Contracts, 1055. 28 In some cases clauses have been upheld though described by the parties themselves

as " penalty " clauses, SIX Elphlnstone V. Monkland !on and Coal C:; Ltd. (1886) 11 App.Cas. 332. Businessmen generally speak of penalty clauses to include agreements to pay liquidatcd damages.

20 Bridge v. Campbell Discounf Co. Lid. [1%2] A.C. 600, 622. 30 [I9151 A.C. 79. 31 It was assumed for purposes of argument that the liquidated damage clause

applied to all these obligations, see per Lord Dunedin at p. 88, and per Lord Parker at p. 99. One could easily imagine breaches of the agreement that could not possibly cause any loss at all to the Dunlop company. Cf. Ford Mofor Co. (England) Ltd. v. Arnufrong (1915) 31 T.L.R. 267.

88 Ibid. p. 97. 32 Supra note 30 at p. 81.


by the parties is E5, and this cannot be said to be extravagant or extortionate, having regard to the nature of the contract.” I4

Just as in the case of the mortgagee’s stipulation for a collateral advantage, clarity, justice, and, in the long run, certainty would be served by an open recognition of a principle of unconscionability. Otherwise there is a danger that perfectly fair and reasonable agreements will be struck down for failure to meet a test that is irrelevant to the true reasons for control. The question in issue should be not the accuracy of the pre-estimate, but the reasonableness of the agreement. These are not always the same.

A general rule of unconscionability would also ease many of the other difficulties that bedevil the law of penalty clauses. The exact definition of what is a penalty clause would cease to be of vital importance. and with the need for that definition would disappear the distinction between penalties and deposits,85 the distinction bchveen unreasonably high and unreasonably low liquidations,8° and, the most curious distinction of all, that between penalties payable on breach, and those payable on some other event. This last distinction is not, I believe, historically justifiedP7 and has led to extraordinary anomalies. For example, a hirer under a hire purchase contract who defaults in breach of contract may be relieved from the enforcement of a “minimum payment ” clause. But a hirer who terminates the hiring in accordance with an option in the contract to do so has no claim to relief because he is not in breach of contract. “ Let no one mistake the injustice of this ’’ Lord Denning was moved to say, “ It means that equity commits itself to this absurd paradox: it will grant relief to a man who breaks his contract but will penalise the man who keeps it.” 88 Yet the “ absurd paradox” has later been reaffirmed?O Surely one need not be any sort of a revolutionary in legal thought to see that Lord Denning was right when he said that if the clause was “ oppressive and unjust ’’ there was a case for equitable intervention, brcach or no breach.l*

DEPOSITS This examination of various forms of forfeiture leads naturally to the most common kind of forfeiture of all, the simple case of a deposit of money to be forfeited on breach of the obligation secured. The only distinction between deposits and penalty clauses is that a deposit is payable in advance whereas a penalty is payable after breach. This distinction seems wholly insufficient to justify the much more generous

94 Ibid. p. 101. 85 See iiifra text at notes 41 et seq. 80 See Lrfru text at notcs 51 et seq. 37 Rclief against pcnal bonds did not dcpe’nd on the “condition” of the bond

itself bcing a promisc. SCC Corbin, Confracfs. 1056, and per Lord Denning in Bridge v. Campbell Discount Co. Lid. 119621 A.C. 600, 629 et seq. 38 Ibid. p. 629. 80 Per Harman L.J., obiter, in United Dominions Trust (Commercid) Lid. v.

E n i s [1%8] 1 Q.B. 54, 67. The case shows that the court will strive to find the hirer in breach of contract in ordcr to grant him relief!

4 0 Bridge V. Cumpbell Discount Co. Ltd. 119621 A.C. 600, 629.


treatment given to the obligor in the one case than in the other. Indeed the distinction practically breaks down in a case where a sum of money payable in advance but not actually paid is treated as a deposit liable to forfeiture, even though the court admits that had the same sum been payable on breach it would have been struck down as a penalty.41

The harsh approach to deposits is usually traced back to Howe v. Smith 4 2 where the court held that a deposit given by a purchaser of land was. on the true construction of the contract, intended to be forfeited on breach. But in that case the court was concerned only with interpreting the meaning of the parties’ agreement, and there is little doubt that it reached the right conclusion on that question. No attention was given to the question of relief against the terms of the agreement, perhaps indeed because the court assumed that no such relief was available, but perhaps again because the amount of the deposit was not extravagant or oppressive and forfeiture was not in the circumstances of that case unconscionable.

Other cases show that the courts will in practice relieve when the deposit is sufficiently large for its forfeiture to be unconscionable. The clearest examples come from instalment sales, where, as Lord Macnaghten pointed out, the penalty of forfeiture of instalments paid becomes more severe as the agreement approaches complet i~n.~~ The granting of specific performance to a late purchaser is one technique of relief.‘” Even where the purchascr is too late for specific performance the Privy Council has extended relief from forfeiture.t5 In another case Webster M.R. said :

“ It is not necessary to deal with the question whether the plaintiff is entitled to a return of the instalments which he has paid, because he has not insisted upon that relief, but I feel very great doubt whether the doctrine of Howe v. Smith would apply to a case in which the purchase money was to be paid in instalments.” 40

“ Here when you look at the . . . agreement, it provides that if the whole 52.000 with interest. or any part of it, however small, remains unpaid after a certain day, then the company shall forfeit the land and the portion of the purchase money which they have paid. It appears to me that this is clearly in the nature of a penalty, from which the court will relieve.” 47

In an earlier case Mellish L.J. had said :

~~ ~ ~

4 1 Hinfon V. Spurkes (1868) L.R. 3 C.P. 161. Dewur v. Minfoff [1912] 2 K.B. 373; contra, Lowe v. Hope [1970] Ch. 94. See Pol[wuy v. Abdulluh [1974] 1 W.L.R. 493, and Note (1975) 38 M.L.R. 349.

4 2 (1884) 27 Ch.D. 89. 43 Kilmer V. Brifish Columbia Orcliurd Lunds Lfd. [1913] A.C. 319, 325. 4 4 Ibid. 45 Sfeednrun V. Drinkle [1916] 1 A.C. 275. 4 0 Cornwall v. Henron [1900] 2 Ch. 298, 302. 4 7 Re Dugenhum (Thumes) Dock Co. ex p . Hulse (1873) 8 Ch.App. 1022, 1025


In more recent cases there is recognition that relief can be givcn where the forfciture is unconscionable,”8 and that principle was accepted by the majority of the Court of Appeal in 1954, though there was some disagreement about its Even Romer L.J.. who took the narrowest view of the court’s powers, accepted that the court would give a defaulting purchaser extra timc to perform even when that involved “ interfering with the contractual rights ” of the vendor.6o I conclude that relief is available against forfeiture of deposits on the ground of unconscionability. The ordinary case of a moderate deposit to secure performance of an agreement to purchase land is generally enforceable, I think, not because the form of the transaction carries somc peculiar immunity from relief, but because forfeiture of a moderate deposit is seen as fair and reasonable, just as was the enforcement of a moderate penalty in Dunlop V. New Garage.

A working paper on Penalty Clauses and Forfeiture of Money Paid (No. 61, 1975) has recently been published by the Law Commission. The Commission, while recognising many of the problems discussed in this paper does not acccpt a general rule of unconscionability. The test of the “ genuine pre-estimate ” for thc validity of penalty clauses is approved. Thc anomaly of confining relief to cases of breach is recognised, but the Commission’s solution, since the notion of a gcneral power to relicve is held unacceptable, involves the creation of a new category of “ near-pcnalty ” clauses, with a cumbcrsomc definition bringing in clauses the object of which is to secure an act or result that is the “ true purpose ” of the contract. Obvious difficulties of interpretation loom here. Then the Commission recognises the strong case for treating pcnalty clauses and deposits alike, but having accepted the test of “ genuine pre-estimate ” for penalty clauses it is in difficulties in proposing an assimilation. For the application of a “ genuine pre-estimate ” test to deposits would invalidate most of them, including the ordinary case of a moderate dcposit by a purchaser of land, the forfciture of which is generally regarded as fair and reasonable. So thc Commission is moved to propose a special exception for land cases, whereby a deposit of a fixcd percentage would bc validly forfeited evcn though not a “ gcnuine pre-estimate ” of loss. Anomalous distinctions are certain to arise here. I suggest that these proposals, if enacted, would improve the law only slightly and at the cost of adding substantial new complexities and anomalies. The cxceptions found nccessary by the Commission surely support the case for a gencral rulc of unconscionability as the simplest and most rational way of dealing with the problems, and, in the long run, I suggest, the most conducive to certainty. T,here is a danger that piecemeal law reform of the kind proposed, by codifying the present rules, in particular the “ genuine pre-estimate ” as the overriding test of validity, may

4a Mussen v. Van Dieman’s Land Co. 119381 Ch. 253. 4 0 Stockloser v. Johnson I19541 1 Q.B. 476. 50 Ibid. p. 501. See now Starside Properties Lid. v. Mustapha [1974] 1 W.L.R. 816.

where the Court of Appeal relieved an instalment purchaser of land.


have the effect of crystallising judicial development at an interim stage thereby impeding the rational development of the law.

EXEMPTION CLAUSES By a natural progression of thought one turns from unduly high liquidations (penalties) to unduly low liquidations (limitation and exclusion of liability). If the courts really are concerned with unconscionability one might expect to find judicial activity in both fields. In fact the field of exemption clauses (clauses excluding or limiting liability) has been the area in which the courts have been most active in recent years in granting relief from contractual provisions. This is not the place for a detailed examination of the cases-indeed, there is no need for it, for this area of contract law has received its due share of attention from The effect of the decisions may, I think, be summarised by saying that the courts have shown a marked antipathy to exemption clauses. Bofore 1966 there was thought to be a rule of law that no exemption clause could apply in case of a " fundamental breach " of contract.62 In 1966 the House of Lords held that there was no such rule of law but that everything depended on construing the true meaning of the contract as a whole.6s The decision. however, made little difference to the actual practice of the court^,^ suggesting a deep-rooted unwillingness to enforce agreements seen as unfair.

There can be little doubt that the moving force behind the courts' attack on exemption clauses has been the apprehension of them as unfair.ss Yet, as a technique of controlling unfair agreements. the doctrine of fundamental breach has grave defects. Lord Reid himself pointed this out: " There is no indication in the recent cases that the courts are to consider whether the exemption is fair in all the circumstances or is harsh and unconscionable, or whether it was freely agreed by the customer."6o The danger is that, just as with mortgages and penalty clauses, the suppression of the true reason for relief will lead to undue rigidity with the accompanying danger of the courts' striking down agreements that are perfectly fair and reasonable?'

51 See Treitel, The Lmv of Contract, 3rd cd. pp. 173-204, Cheshire and Fifoot, Law of Conrracf, 8th ed. pp. 123-141, Anson's Low of Confruct, 23rd ed. pp. 142-176, and articles referred to there. Coote, Exception Clauses.

5 2 Sce Karsules (Harrow) Lid. v. Wallis [1956] 1 W.L.R. 936. 6s Suisse Aflantique Societe d'Artnement Maritime S.A. v. N.V. Rotterdamsche

Kolen Centrule (19671 1 A.C. 361. 54 Scc Waddams, " Comment " (1971) 49 Can.Bar Rev. 579. ~3.Cases such as Karsdes V. Wallis [1956] 1 W.L.R. 936, supra, relieving a consumer

buyer of a motor vehicle, would surely have been decided diflercntly if the buyer had been a scrap metal dealer who knew what he was buying. See now Lord Denning's comment quoted at note 59, infra.

50 Suisse Atlanfique [1%7] A.C. 361, 406. 57 Exemption clauses arc often quite fair and rcasohable in cases excluding liability

for damage to propcrty or for busincss losses. It is difficult to see why the agreement struck down in Harbuff's Plasticine Lfd. V. Wayne Tank and Pump Co. Lfd. [1970] 1 Q.B. 447 was in any way unconscionable. It might well be argued that the loss of a factory by fire can more efficiently be insured against by the factory owner than by


The same can be said of techniques of adverse construction. of which the doctrine of fundamental breach is, since Suisse Adantique, an example. It is tempting for courts wishing to grant relief, but unwilling to state the reason, to “ construe ” the contract in such a way as to reach the result desired. As Llewellyn pointed out 35 years ago, the dangers are, first, that the draftsman is encouraged to redraft more explicitly, secondly, that in failing to face the real issue the courts do not begin to accumulate the nccessary experience and authority, and, thirdly, that later attempts at true construction are distorted.88 Lord Denning M.R. recently said much the same:

‘‘ What is the justification for the courts in this or any other case, departing from the ordinary meaning of words? If you examine all the cases you will, I think, find that at bottom it is because the clause (relieving a man from his own negligence) is unreasonable or is being applied unreasonably in the circumstances of the particular case. The judges have then, time after time, sanctioned a departure from the ordinary meaning. They have done it under the guise of ‘ construing ’ thc clause. They assume that the party cannot have intended anything so unreasonable. So they construe the clause ‘ strictly.’ They cut down the ordinary meaning of the words r,nd reduce them to reasonable proportions. . . . The time may come when this process of ‘ construing ’ the contract can be pursued no further. The words are too clear to permit of it. Are the courts then powerless? Are they to permit the party to enforce his unreasonable clause, even when it is unconscionable, or applied so unreasonably as to be unconscionable? When it gets to this point, I would say, as I said many ycars ago: ‘There is the vigilance of the common law which, while allowing freedom of contract, watches to see that it is not abused.’ , . . It will not allow a party to exempt himself from his liability at common law when it would be quite unconscionable for him to do so.”

But Lord Denning went on to hold the agreement in the particular case before him perfectly fair and reasonable. He continued : “ I know that the judges hitherto have never confessed openly to the test of reasonableness. But it has been the driving force behind many of the decisions.” 8o

Once again, recognition of the general principle of unconscionability enabled the court to escape from undue rigidity in order to uphold, rathcr than to strike down an agreement. It is not the recognition but the suppression of the principle of unconscionability that would, I suggest, justly earn the court the name of destroyer of bargains. Once it is recognised that the rational basis for the control of exemption clauses rests on unconscionability, two conclusions follow. First, that the doctrines of fundamental breach and adverse construction are

the supplier of a product. Compare Lord Denning’s Inter decision and reasoning in Gillespfe Brothers arid Co. Ltd. V. Roy Bowles Transport Lid. [1973] 1 Q.B. 400.

58 Book Review (1939) 52 Harv.L.Rev. 700, 702-703. 69 Gillespie Brofhers a d Co. Ltd. V. Roy Bowles Transport Lid. [1973] 1 Q.B. 400,

415.


“ awkward tools ” O0 and. secondly, that outside tlie consumer context:’ there is no need for a special rule at all for exemption clauses. For many exemption clauses are perfectly fair and reasonable, and there are many unconscionable agreements that could not be classed as exemption clauses?*

One particular line of cases on exemption clauses deals with the case of an agreement between two parties whereby one agrees to the limitation of the liability of a third. Here. I suggest, the doctrine of privity of contract has been used by the courts as a ready technique of avoiding the enforcement of exemption clauses they see as unfair. Again, the result has been, in my view, that in the commercial context, where such clauses may be quite fair and reasonable, there is the danger of the courts’ reaching the wrong result. Indeed, I think that this occurred in Scruttons v. Midland Siliconesos where the court struck down a limitation of liability for damage to goods in circumstances where the limitation was reasonable and sound, particularly from the point of view of insurance. It is interesting to note that in a recent case on rather similar facts, the Privy Council has now managed to find a technique of enforcing such a limitation.M The reason, it may be suggested, that the Privy Council, like the New Zealand Supreme Court were at such pains to find a way of enforcing the agreement is that, unlike the cases of personal injuries to consumers O5

the limitation of liability for damage to goods in a commercial context was perfectly fair and reasonable, and striking it down would have made nonsense of the parties’ insurance arrangements.Oo

INCORPORATION OF DOCUMENTS Exemption clauses are generally contained in printed documents, and when one turns to the courts’ approach to the incorporation of unsigned documents (many of which involve exemption clauses) similar tensions can be discovcred. On the surface the law is said to be that documents are incorporated if notice is given that terms exist in circumstances that would lead the reasonable man to conclude that

~ ~

00 Risk, Recent DeveZopmerifs in Coitfracrs, Special Lccturcs of the Law Society of Upper Canada (1%6), p. 253.

01 In thc case of consumer transactions I accept that an outright ban may bc justifiable in transactions that are sufficicntly standardised for unconscionable clauscs to be identifiable in advahce. Judicial flexibility is of little use to a consumer who cannot afford to litigate. See my comment in (1371) 49 Can.Fhr Rcv. 579, 598-603.

02 As Professor Coote has pointed out in his book, Exception Clauses, pp. 7-8, there is no real dividing line betwccn a clausc limiting liability, and a clause simply defining a narrowcr basic obligation. There is no rational rcason for restricting the control of unconscionable agreements to what can be properly classified as exemption clauses.

03 [1%2] A.C. 446. 0 4 New Zealatid Shipping Co. Lfd. V. A . M . Safterthwaite & Co. Ltd. [I9741

08 Such w e s as Adfer V. Dickson (19551 1 Q.B. 158; Cosgrove V. Horsfall (1946)

66 Sec Lord Dcnning’s dissenting speech in Scrurron’s Ltd. v. Midland Silicones

2 W.L.R. 865.

62 L.T.R. 140; Genys v. Marthews [1%5] 3 A11 E.R. 24.

Lid. [1962] A.C. 446, 481432 and 491-492, Trcitcl, op . cit., p. 548.

July 19761 UNCONSCIONABILITY I N CONTRACTS 381

they were to be incorporated in the ~0ntract.O~ This formula says nothing of the reasonableness of the terms themselves. Yet even in the early cases one finds a concern with reasonableness,@S and recently this concern has become more marked. In a recent case Lord Denning said of a term in a document sought to be incorporated: " In order to give sufficient notice, it would need to be printed in red ink with a red hand pointing to it-or something equally startling." O0 Surely the doctrine of notice is here being used to regulate the use of unreasonable terms.

Such cases might seem to suggest that it is becoming more difficult to incorporate unsigned documents. Yet in the commercial context a number of cases seem to have incorporated documents with remark- able ease.70 Lord Denning himself in a recent case incorporated a printed form that had not even been sent at the time of the ,oral contract to the party held to be bound by it. The reason for the difference of approach appears in the judgment. Distinguishing another case where a document had not been incorporated he said: '' That was a case of a private individual. . . . The plaintiff there was not of equal bargaining power. . . . The conditions were not incorporated. But here the parties were both in the trade and were of equal bargaining power." I1 The trial judge had held that the document was not incorporated, relying. one may suppose, on the consumer cases mentioned by Lord Denning.7z The Court of Appeal reversed him by reference to the comparative bargaining power of the parties, likely to be a prime criterion in any formulation of a rule of uncons~ionability.~~ Again, recognition of the general principle tends to the upholding of fair and reasonable agreements, but a suppression of the principle distorts the rules of contract formation.

DOCUMENTS AND CONSENT The use of consent theories to deal with unfair clauses in documents. signed or unsigned, has led some commentators to attempt to reduce the whole problem of unconscionability to a question of con~ent.~' I think that this approach is unhelpful, and ultimately results in a redefinition of consent in such ,terms that an unconscionable provision

~

07 Parker v. Sourh Eartmtt Railway Co. (1877) 2 C.P.D. 416, per Mellish L.J. at

08 Ibid. per Bramwell L.J. at p. 428. 80 Thorntoti v. Shoe Lane Parking Lid. 119711 2 Q.B. 163, 170. 7 0 J . Spurling Lid. v. Brudshaw (19561 1 W.L.R. 461; British Road Services Lid.

v. Arthur V. Crutchley & Co. Ltd. [1%8] 1 All E.R. 811; Kendall (Henry) & Sons Ud. v. William Lillico & Sons Ltd. [1%9] 2 A.C. 31.

71 British Cram Hire Corp. Lid. V. Ipswich Plant Hire Ltd. [1974] 2 W.L.R. 856, 861.

7 2 Hollier v. Rambler Motors (A.M.C.) Lld. 119721 1 All E.R. 399, McCutcheon v. David MacBrayne Lid. 119641 1 W.L.R. 125.

78 The theme runs through the equity cases discussed below at notes 1 et seq. See also Sale of Goods Act 1893, as amcndcd by the Supply of Goods (Implied Terms) Act 1973, s. 55 (5) (a).

74 Murray, " Unconscionability, unconscionability " (1969) 31 U.Pitt.L.R. 1.

420-424.


is presumed ips0 fucro not to have received assent, or " true " assent.78 The lack of assent becomes then not a reason for relief, but a statement of a conclusion that relief will be granted, suppressing any analysis of the criteria of unconscionability, which must be the true ground for the decision. Absence of consent as a technique for controlling unfair agreements gocs at the same time too far and not far enough. Too far because one may surely sign or accept a document in circumstances that manifest an asset to its contents without knowing their details. To grant relief in every case of actual subjective ignorance of the contents of signed documents or of their effect would go much too far.7o On the other hand there may be circumstances where the contents are known77 but relief may be justified on grounds of unconscionabili ty.

There will be an overlap in particular cases. One to whom the contents of a document are misrepresented, tacitly or expressly, or who relies on oral statements inconsistent with the doc~rnent ,~~ may be granted relief either on the ground that he did not assent to the contents of the document, or (in an appropriate case) that the contents are unfair. But there is. I suggest, a distinction in principle between the defences of no assent and unconscionability. In some cases both will be available, but in many others only one will apply.

INTERPRETATION There are many cases on interpretation and construction of contracts in which it might be argued (I think justly) that notions of fairness have influenced the court's conclusion. Extensive analysis, however, is not likely to be fruitful for in many cases it is a matter of opinion how far the court has been influenced by the thought that an adverse interpretation would make the contract unconscionable. Few would dispute that the cases on fundamental breach, adverse construction. strict construction, and construction contra proferentem, some of which have been discussed above.7O are techniques used by the courts to control the use of unfair provisions in printed documents.

~

7s Murray, supra, note 74, seems to regard a rule of unconscionability as a means of establishing the pnrties' true agreement. But his tests for '' verification of assent " turn out to be tests of unfairness.

70 This seems to be an objection to Spencer's suggestion in " Signature, Consent, and the Rule in L'Esfrange V. Gruucob" (19731 C.L.J. 104, 105 that the signer of a document should be relieved from its terms if he " simply did not agree " to them. The article as a whole, however, suggests to me thtt Spencer's real concern is with the unfairness of the term in qucstion. See p. 115: Who in their right mind would sign a document headed ' I agree to pay fol;,your goods even if they are useless, and not to sue you even if they injure me'? Like Murrny he presumes absence of consent to a clause that he sees as unconscionable. But the true reason for relief is the uhconscionability.

77 Or suspected, for " it would be a strangely gencrous set of conditions " as Lord Dcvlin pointed out in McCutclieon V. MacBrayne 119641 1 W.L.R. 125, 132-133, that did not contain an exemption clause. Surely the knowledge of the term should not, in the complete absence of bargaining power, preclude relief.

78 See Mendelssohri v. Normand 119701 1 Q.B. 177 where the Court of Appeal puts forward a general rule of relief in case of inconsistent oral statements. Sec Waddams, loc. cit. at pp. 588-589. 79 Supra, notes 51-62.


The cases implying terms into contracts often also conceal a judicial control over agreements that would otherwise be unfair.8o I take one example only, the cases on the duty of one party to stay in business so as to enable 'the other (usually an agent) to earn some profit or commission. As Burrows has shown, cases indistinguishable on the facts are decided in contrary ways.9l I would suggest that the cases going in favour of the agent are often cases where the principal is attempting, in the court's view unfairly, to deprive the former of the agreed compensation for his services. In one such case Bacon V.-C. said :

'' But it would be very strange if . . . after all these dealings . . . it was in the power of a company . . . by going through the ceremony of a voluntary winding-up to put an end to their contracts. It would be monstrous if that were so. . . . It would be in the highest degree unreasonable. . . . It would be wholly inequitable and unjust." 82

It has already been shown that the courts will regularly relieve against forfeiture of various

An analogy may be drawn with the cases on substantial performance, particularly of building contracts. The terms of the contract usually provide that complete performance by the builder is a condition of the owner's obligation to pay. The consequence of a literal reading of such an agreement would be to deprive the builder of all compensation for a trivial deviation. A series of cases established, however, that unless the builder leaves the work unfinisheds' or departs substantially from the contract,8a he can recover his price subject to a deduction measured by the extent to which the work falls short.'80 The principle appears to be that the owner can be adequately compensated by a money allowance, and it would be unconscionable to insist upon forfeiture of the whole price for a trivial deficiency.87 The same may be said of other cases on construction of contractual remedies. A recent example concerned the effect of a contractual term

80 See Burrows, " Contractual co-operation and the implied term " (1968) 31 M.L.R. 390, where it is shown that the implication of terms is by no means restricted to cases of " business necessity."

81 Ibid. p. 399. The result often depends on which party has the supposedly onerous task of requiring the implication of n term. But in one case two judges in the same court disagreed on whether it w a s the principal who had to argue for the implication of a term that the benefit could be ended, or the agent who had to imply n term that the businns would be continued, Brace v. CaZder [1895] 2 Q.B. 253. So the decisidn may turn on where the court sees express obligations shading into imnlied ones.

Sz Re Parent Floor Cloth Co. (1872) 41 L.J.Ch. 476, 477, followed in Warren & Co. v. Agdeshman (1922) 38 T.L.R. 588.

83 Supra, notes 6-50. 8 4 Sumpter v. Hedges [1898] 1 Q.B. 673. 8s Bolton V. Mohudevu 119721 1 W.L.R. 1009. 80 H. Dukin & Co. Ud.- v. Lee [19161 1 K.B. 566; Hoenig v. Isaacs [1952] 2 All

E.R. 176. 87 In Jacob & Youngs Inc. V. Kent (1921) 2:? N.Y. 239; 129 N.E. 889, Cardozo J.

of forfeiture and of considerations spa? of the " harshness " and " oppression of equity " and " fairness ".


described as a “ condition.” The ordinary legal meaning of thc word would be said by most lawyers to be that on breach of the term so denominated the other party was entitled to terminate. In the particular case the result of such a construction would have been to enable one party to terminate the contract on a quite trivial breach by the other. The House of Lords might have said : “ That is not our concern; the parties, in calling this tern] a condition, have presumably put their own value on the importance of breach.”88 But instead they so construed the meaning of the word “ condition ” in its context as to deny the right to terminate except on a serious breach. Lord Reid said:

“ The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they should make that intention abundantly clear.”

Lord Simon described the result of a contrary construction as “ absurd ” OO; Lord Morris used the word “ fantastic ” Lord Kilbrandon spoke of avoidance of “ unreasonable results ” and ‘‘ grotesque consequences.” e2 The reader can hardly doubt that the perceived unfairness of the apparent meaning of the contract has influenced the court’s conclusion.

There is a relationship between good faith, interpretation, and unconscionability. There is said to be no general doctrine of good faith in English lawPJ but I think that the cases on interpretation show that good faith is an important factor in the process of interpretation. With good faith as a guide to interpretation, and unconscionability as a ground for relief when interpretation fails, English law goes a long way towards the control of unfair agreements. The interpretation approach moreover adds an important element of flexibility in allowing a court to avoid an unconscionable result without striking down the whole agreement.

DURESS I turn now to those areas of the law that have directly faced the problems of unfairness and inequality of bargaining power. The common law has always recognised a defence of duress, but its scope has remained narrowly dcfined, chiefly. no doubt, because the courts of equity were prepared to grant relief in a much wider variety of

88 As did Lord Wilberforce, dissenting, p. 263 (note 89, irifra). 80 L. Schuler A.G. V. Wickman Macliine Tool Sales Lfd. 119741 A.C. 235, 251. 00 Ibid. p. 265. 01 Ibid. pp. 255-256. 02 Ibid. p. 272. 09 There is no general duty of disclosure; (Cheshire and Fifoot, Law of Corifracf,

8th ed. p. 274) terms will not be implied simply because they are reasonable (Treitel, The Law of Confracf, 3rd ed. p. 162); Lord Reid has said that there is no rule that contractual rights must be exercised reasonnbly: While and Curter (Councils) Lfd. v. McGregor [I9621 A.C. 413,430. See Powell, I‘ Good Faith in Contracts ” (1956) 9 Currenf Legal Problems 16, 25 and 28.

July 19761 UNCONSCIONABILITY I N CONTRACTS 385

cases. It is often said that no relief is given for economic duress or duress of goods, but only for duress of the person." However, when one turns to another branch of the law it appears that restitution can be given of such benefits as tolls extracted under threat of seizure of goodsg5 and, in a recent Canadian case, fees paid to a municipality to secure its consent to a sale of land.B0 Every such case must involve an agreement to pay, if only for the instant before actual payment. Yet these are cases of economic duress where contractual relief, it is said, could not be granted. But surely the rules are legally incompatible, for one can hardly have a situation where an enforceable contract, when executed, gives rise to an immediate right of restitution in the disadvantaged party. Execution of a contract may sometimes be a bar to relief, but it can hardly be a prerequi~ite.~'

One line of cases that clearly does grant contractual relief for duress of goods concerns maritime salvage, where it has been held that a price agreed for salvage services will not be enforced unless " fair and just." D8 In one case Bucknill J. said : " I have to ask myself whether the bargain that was made was so inequitable, so unjust, and so unreasonable that the court cannot allow it to stand. . . . This was an inequitable. extortionate, and unreasonable agreement. . . ." These cases, decided at a time when freedom of contract was highly prized as a principle, go far so show that countervailing considerations can never be entirely suppressed.

PROTECTION OF WEAKER PARTIES Equity went very much further than the common law in relieving weaker parties from their contractual engagements. In addition to the cases on infants and drunkards, there was a general protection afforded to those of weak intellect which went well beyond the class properly described as lunatics.' Of more general significance are the cases in which there was no weakness of intellect. but simply an undue advantage taken of inequality of bargaining power.

In the case of sales of reversions by expectant heirs the court's protcction went so far as to require the party seeking to uphold the transaction to prove that the price paid was equal to the value of the property purchased.2 Relief was said to be " founded upon the presumption that the parties dealing do not stand on equal terms," 3

W Cheshire and Fifoot, o p . cif. p. 281. QJ Markell v. Horner I19151 3 K.B. 106, Morgan v. PnImer (1824) 2 B. & C. 729.

Austrnlinn cases go even further. See Mmon < Sfafe of New S o h W d e s (1958) 102 C.L.R. 108; Bell Bros. Pty. Ltd. V. Shire o f Serpefrfine-Jarrahde (1969) 121 C.L.R. 137.

96 Eudie V. Town of Branfjord [1%7] S.C.R. 573. 0' See Goff nnd Jones, The Law of Resfifufion, pp. 150-151, Beatson, " Duress ns

08 Akerblorn v. Price (1881) 7 Q.B.D. 129, 133. 99 The Port Caledonia and The Anna [1903] P. 184, 190. 1 See Blackford v. Christian (1829) 1 Knapp. 73. 2 Sheridon, Fraud in Equity (1956) pp. 135-138. 8 Bawfree v. Wafson (1834) 3 My. & K. 339, 341.

a vitinting factor in contrnct [1974] Cnm.L.J. 97, especially at pp. 106-108.


a presumption which, as pointed out in another case, was not always justiEed? As Lord Se1,borne said in 1873: “The arbitrary rule of equity as to sales of reversions was an impediment to fair and reasonable, as well as to unconscionable bargains.”6 A familiar pattern repeats itself; again the courts’ failure to recognise the underlying principle of unconscionability led to undue rigidity, which was relieved, in this case, by statute,O the terms of the statute specifically preserving “ the jurisdiction of the court to set aside or modify unconscionable bargains.”

Relief extended beyond “ catching ” bargains with expectants to all kinds of agreements.’ In 1818 it was said: “ A court of equity will inquire whether the parties really did meet on equal terms; and if it be found that the vendor was in distressed circumstances, and that advantage was taken of that distress, it will avoid the contract.”8 In Fry v. Lane, summarising the decisions, Kay J. said:

“ The result of the decisions is that where a purchase is made from a poor and ignorant man at a considerable undervalue, the vendor having no independent advice, a court of equity will set aside the transaction. This will be done even in the case of property in possession. and a fortiori if the interest be rever- sionary. The circumstances of poverty and ignorance of the vendor and absence of independent advice throw upon the purchaser, when the transaction is impeached, the onus of proving, in Lord Selborne’s words, that the purchase was ‘ fair, just and reasonable.’ ”

This line of cases has been taken up and extended in a series of modern Canadian cases. The clearest cases of relief on this ground have been in favour of vendors of land,1° but analogous cases have granted relief also to buyers of goods and services.” and to injured persons who disadvantageously agree to release their actions for damages for personal inj~ries.’~ These cases, adopting a comment by a Canadian writer.” lay down as the criterion of relief an immoderate gain or undue advantage taken of inequality of bargaining power.

4 Shelley v. Nasb f1818) 3 Madd. 232, 236. 6 Earl of Aylesford V. Mom’s (1873) 8 Ch.App. 484, 490. 0 Sales of Reversions Act 1867, now LAW of Property Act 1925, s. 174. 7 Sheridan, op. dr. pp. 73-86 collecting a variety of cases in which agreements

were set aside for undue advantage taken of weakness or necessity. Some of the cases speak of “ fraud,” but it is clear that fraud is presumed from the inequality of the parties; see Garfside v. Isherwood (1778) 1 Br0.C.C. 558; Buckley v. Invin (19601 N.I. 98, 104-105. See the comment of Kay J. in Fry v. Lane (1888) 40 Ch.D. 312, 324.

8 Wood v. Abrey (1818) 3 Madd. 417, 423 per Leach V.C. 0 Supra (1888) 40 Ch.D. 312. Lord Selbome’s words were from E d of Ayresford v.

Morris (1873) 8 Ch.App. 484, 491. 10 K ~ p p v. Bell (1966) 58 D.L.R. (2d) 466, affd. 67 D.L.R. (2d) 256; Mursbull V.

Canada Permcuient Trust Co. (1968) 69 D.L.R. (2d) 260; Mundinger V. Mundinger (1968) 3 D.L.R. (3d) 338; Paris v. Marcbnik (1973) 32 D.L.R. (3d) 723. See also the English case of Cresswell v. Porrer, noted [1971] New L.J. 1160.

11 W.W. Disrriburors & Co. Lrd. v. Tborsteirtrsen [1960] 33 W.L.R. 669. 12 Gaertrier v. Fiesta Dance Sfudios Lrd. (1973) 32 D.L.R. (3d) 639, cf.

is Towers v. Afleck [1974] 1 W.W.R. 714; Pridmore V. Culvert (1975) 54 D.L.R. 1 4 Crawford, comment (1966) 44 Can.Bar Rev. 142.

Griessbanimer V. Ungerer (1958) 14 D.L.R. (2d) 599.

(3d) 133.

July 19761 UNCONSCIONABILITY IN CONTRACI’S 387

In addition to these general cases there is the relief granted in cases of undue influence, where there is some personal relationship between the parties. actual or presumed, that makes enforcement of their agreement unfair.I6 These cases are closely related with the more general jurisdiction over unconscionable agreements, and, it has recently been suggested, can usefully be seen as specific examples of the more general principle. Roferring to several lines of cases including those on duress, unconscionable transactions and undue influence, Lord Denning has said: “ Gathering all together, I would suggest that through all ,these instances there runs a single thread. They rest on inequality of bargaining power.” lo

WITHHOLDING DISCRETIONARY REMEDIES A number of cases have refused or limited on the ground of unconscionability the enforcement ordinarily given to agreements. Until the eighteenth century the award of damages was itself regarded as discretionary, and the powers of the jury in awarding damages have been described as ‘‘equitable.”17 In a case where the defendant had unwisely agreed to pay a price measured by a progressive multiplica- tion, the court said: “Let them go to trial: and though this would amount to a vast quantity, yet the jury will consider of the folly of the defendant, and give but reasonable damages against him.” la

Some cases have suggested that the equitable remedy of specific performance may be withheld from an agreement thought to be unconscionable. Rescission is also an equitable remedy, so it is quite within the power of the court to grant the more drastic remedy. In some cases, however, the court has adopted an intermediate position refusing to rescind the agreement, but refusing also to decree specific performan~e.~~ It is difficult to disagree with the following comment : “ If the Chancellor’s conscience rebels at the thought of specifically enforcing so hard a bargain, why is it so easily appeased by a dismissal of the bill, which opens the door to the imposition of heavy damages

15 Sheridan, op. cit. pp. 87-106. 16 Uoyds Bank Lid. v. Bundy [1974] 3 W.L.R. 501, 508-509. Sir Eric Snchs, with

whom Cairns L.J. agreed, though agreeing in the result of the case, was more cautious about generalising though admitting “ some sympathy ” with Lord Denning’s views (516). Lord Denning’s views were quoted with approval by the Ontario High Court in McKettzie V. Bank of Montreal (1975) 7 O.R. (2d) 521, where a bank was held to have taken unfair advantage of a woman’s emotional relationship with a man and of n wrongful seizure of the woman’s cnr.

1 7 Washington, “ Dnmages in Contract at Common Law ” (1932) 47 L.Q.R. 345, 48 L.Q.R. 90, 106.

18 Thornborough V. Whiraker (1703) 6 Mod. 305. A similar cnse was James v. Morgan (1664) 1 Lev. 111 (both cases involved progressive doubling of grains of corn). The cases were referred to with apparent approval by Lord Hardwicke in Earl of Chesrerfield v. Jamsen (1751) 2 Ves.Sen. 125, 155. They are criticised by Sheridan, op. df. nt p. 168 apparently on the ground that they depended on mcre inequality of exchahge. But could it not be assumed that the nature of the transaction itself indicated also an inequality of bargaining power-thinly of mathematical understanding?

18 Savage v. Taylor (1736) Cas.T.Talbot 234; Day V. Newttan (1788) 2 Cox.Ch. 77.


at law? ” 2o A sound case can be made for the refusal of a decree of specific performance when there is something about that remedy (as opposed to damages) that would impose undue hardship. But if the objection to enforcement is the unconscionability of the agreement itself, it would seem that the objection should preclude damages as well as specific performance.21

Another question always said to be within the discretion of the court is the award of costs, and sometimes the court will use its discretion to deprive a successful party of costs in cases of unconscionability that fall short of grounds for relief from the agreement itself. Daniell has written: “If a party obtains an unconscionable advantage over another, the court, although it may not feel itself justified in depriving him of the advantage he has gained, will not give him his costs of enforcing it.’’22

CONSIDERATION It is said that the court will not, in general, inquire into the adequacy of consideration.2B It docs, however, inquire into whether there is sufficient consideration for enforceability, and in some of the cases finding no consideration it may be suggested that the court has been influenced more by the unconscionability of the agreement sought to be enforced, than by any real inquiry into the exchange of values. This influence is particularly apparent in cases of a promise made in consideration of the promisee’s performing a pre-existing contractual duty. Though most cases put the refusal to enforce such promises on the basis of absence of c~nsideration?~ others suggest that the real reason is the fear of improper pressure exerted on the promisor.25 An analogous case is that of a creditor who agrces to take less than the full debt owed to him. Though most cases again refuse enforcement on the ground that there is no consideration *O and .in many cases it is the creditor rather than the debtor whose conduct is unconscionable, a case decided in 1966 illustrates the possibility of undue pressure being exerted in such cases on the creditor.27 Again, the danger is that unless the true ground for such decisions is recognised, the courts will strike down business adjustments and settlements that are perfectly fair and reasonable.

20 Note (1934) 32 Mich.L.R. 518, 525. 21 In Buckley V. Zrwin (19601 N.I. 98, the court not only refused specific performance

but grantcd rescission, eveh though not claimed in the pleadings. 22 Daniell, Chancery Practice, 8th cd. 1914, p. 1039. 23 Cheshire and Fifoot, op. cit. p. 69, Treitel, op. dr. p. 64. 2 4 Stilk v. Myrick (1809) 2 Camp. 317, but notc the different reasons given in 6

Esp. 129, Gilbert Steel Ltd. v. University Construction Lid. (1973) 36 D.L.R. (3d) ,496.

26 Harris v. Watson (1791) Peakc 102 per Lord Kenyon at p. 103. za Foukes v. Beer (1884) 9 App.Cas. 605. 27 D. & C. Builders Lid. V. Rees 119661 2 Q.B. 617, especially at p. 625.

July 19761 UNCONSCIONABILIW IN CONTRACTS 389

RESTRAINT OF TRADE Cases striking down agreements in restraint of trade generally give as the reason for intervention the public interest in protecting free trade. However, one of the criteria of validity is that the agreement should be reasonable as between the parties 28 and there can be little doubt that the courts have by this means exercised control over unconscionable agreements. In a recent case striking down an agreement between a composer of music and a publisher Lord Reid said:

“If contractual restrictions appear to be unnecessary or to be reasonably capable of enforcement in an oppressive manner, then they must be justified before they can be enforced. [Lord Reid then discussed the particular agreement and continued] . . . I need not consider whether in any circumstances it would be possible to justify such a one-sided agreement. It is sufficient to say that such evidence as there is falls far short of justification.” 2e

“ What your lordships have in fact been doing has been to assess the relative bargaining power of the publisher and the song writer at the time the contract was made and to decide whether the publisher had used his superior bargaining power to exact from the song writer promises that were unfairly onerous to him. . . . Under the influence of Bentham and of Zaissez faire the courts in the nineteenth century abandoned the practice of applying the public policy against unconscionable bargains to contracts generally, as they had formerly done to any contract considered to be usurious, but the policy survived in the application to penalty clauses and to relief against forfeiture and also to the special category of contracts in restraint of trade. If one looks at the reasoning of nineteenth century judges in cases about contracts in restraint of trade one finds lip service paid to current economic theories but if one looks at what they said in the light of what they did, one finds that they struck down a bargain if they thought it was unconscionable as between the parties to it, and upheld it if they thought it was not. So I would hold that the question to be answered . . . is : was the bargain fair? ” 30

This is surely the language of a vigilant court that allows freedom of contract, but watches to see that it is not abused.

Lord Diplock spoke even more plainly:

LEGISLATION Common lawyers are sometimes inclined to think that control of agreements by legislation can be treated as a serics of special exceptions

28 Nordenfelt v. Maxim Nordenfelt Gum and Ammuttition Co. [1894] A.C. 535, 565.

28 A. Schroeder Music Publishbig Co. Ltd. V. Macaulay [1974] 1 W.L.R. 1308, 1314-1 3 15.

30 Ibid. p. 1315. Sce now Cliflord Davb Management Ltd. v. W.E.A. Records Ltd. [1975] 1 W.L.R. 61, C.A. where the cases on restraint of, trade arc linked with those on exemption clauses and undue influence as instances of inequality of bargaining power.”

390 THE .MODERN LAW REVIEW [Vol. 39

leaving intact, indeed strengthening81 the common law rule that the courts will not of their own motion control agreements, But legislation, like judicial decisions, reflects the needs of a society, and the fact that the need for control of agreements has become so pressing in particular cases as to prompt legislative intervention argues, to my mind, in favour, rather than against the need for general control.

Legislative control of unfair agreements generally takes one of two forms. The first is the advance prohibition (or, in some cases, the positive prescription 32) of particular contractual terms and clauses,Sa a technique that works well only when it is possible to isolate desirable or undesirable terms in more or less standardised tran~actions.~~ The second form is to give the court a discretion to strike down agreements that are “ harsh and unconscionable ” so or that are not “ fair and reasonable.” Be ‘This second form of legislative intervention is of more general applicability. and points in the direction in which, I have argued, the courts are themselves moving. It would easily be integrated with a general judicial control, and whether the statutory words are “ harsh and unconscionable ” or “ fair and reasonable ” the court could be expected to develop consistent standards.

TOWARDS A GENERAL PRINCIPLE

The common law traditionally develops by the use of fictions. Lip service continues to be paid to an old rule, but as decisions multiply exceptions to it, it becomes an empty shell and at last can be discarded without effecting any great change in the actual practice of the My argument is that this stage has now been reached in respect to a rule of unconscionability. I have attempted to show that, despite lip service to the notion of absolute freedom of contract, relief is every day given against agreements that are unfair, inequitable, unreasonable or oppressive. Unconscionability. as a word to describe such control. might not be the lexicographer’s first choice, but I think it is the most acceptable general word. It has historical antecedents 8s; it occurs consistently throughout the cases in the various branches of the law discussed; it has been accepted as a general ground of relief in modern

31 Because the special legislative exception proves the gcheral common law rule. 32 See for example the provisions of the Insurance Act R.S.O. 1970, c. 224. 33 Rcccnt examples are provided in several jurisdictions by the ban on exemption

clauses in consumer sale transactions, see, for example, Supply of Goods (Implied Terms) Act 1973, s. 4 adding section 55 (4) to the Sale of Goods Act.

34 See note 61, supra. 33 Moneylenders Act 1900, ahd Acts in other jurisdictions based on it. In the United

Kingdom this Act is now replaced by the Consumer Credit Act, ss. 137-139, with test of “ extortionate.”

30 See Supply of Goods (Implied Terms) Act 1973 adding section 55 (4) and (5) to the Sale of Goods Act 1893, Misrepresentation Act 1967, s. 3.

87 See L. L. Fuller, Legal Fictions. The development of the law of liability for damage caused by defective products illustrates, I believe, this kind of dcvclopment.

38 See the equity cases discussed at notes 1-16, supra.

July 19761 UNCONSCIONABILITY IN CONTRACTS 39 1

Canadian cases,3O and it is recognised by statute both in Common- wealth and American jurisdictions.4o

An argument frequently raised against recognition of a general power of relief is that it would contribute to unccrtainty.*l I would say that certainty, though an important value in contract law, is not an absolute one, and the cases discusscd in this article show that other values cannot be suppressed. Moreover, if my argument is accepted, that is that agreements are in practice set aside quite frequently and generally, it must conduce to certainty rather than uncertainty to recognise the general principle. At present we have the worst of both worlds-what for example could be lcss certain than the law on exemption clauses? The effect of suppressing the true principle underlying a line of cases is to produce a rule that not only fails to relieve when relief is justifiedd2 but that strikes down agreements that are perfectly fair and reasonablc.m Only with open recognition of the true principle can the courts begin to develop rational criteria and guidelines that will satisfactorily explain their dccisions and offer a useful guide for the future. I do not underestimate the difficulty of developing such guidelines, but I do maintain that to make a start on that task would be an advance in certainty as well as in justice.

Another compelling reason for adopting a general principle of unconscionability is the need to fill the gaps between the existing islands of intervention. The clause that is not quite a penalty clause 4 4

or not quite an exemption clause46 or just outside the provisions of the Moneylenders' Act 46 or the Misrcpresentation Act 4 7 will fall under the general power to relieve and anomalous distinctions like those castigated by Lord Denning in Bridge v. Campbell Discount 4.q

will disappear. FUTURE DEVELOPMENT

Given the open recognition of a general principle of unconscionability one would expect the courts to develop guidelines. There is eveg reason to think that they would be fully equal to this task. In many of the cases discussed in this article the reader can without great

~-

39 Sco note 10 on p. 386, supra. 4 0 Moneylenders Act 1900 (now replaced in thc United Kingdom by Consumer

Credit Act 1974 with test of " extortionate "), Law of Property Act 1925, s. 174 (2), Uniform Commercial Code, ss. 2-302.

4 1 In the Law Commissions' report on Exemption Ch-iuses in Contracts, Law Corn. No. 24, Scot. Law. Com. No. 12, the Commissioners were equally divided on the question. Fortunately, in my view, those who favoured a gcncral power eventually prevailed, see Supply of Goods (Implied Terms) Act 1973, s. 4.

42 Because deserving cases fall outside the rigid NICS allowing intervention. 4 3 As in Harbtrrt's Plasticine (19701 1 Q.B. 447. 44 Bccausc it is a deposit in advance, or because there is no breach of contract. 41 Because thc obligor has an option to perform in a variety of ways, or becnusc

40 Because the lender is not in the business of moneylending within the stntutory

47 Misrcprcsentation Act 1967, s . 3. See Overbrooke Estates Ltd. V. Clericombe

4.9 Supm, at p. 375.

the effect of thc clause in question is to narrow the basic contractual oligation.

definition.

Properties Ltd. [1974] 1 W.L.R. 1335.


difficulty detect the factor or set of factors that led the court to intervene. Clearly inequality of values exchanged cannot in itself be enough do or the courts would “ throw every thing into confusion and set afloat all the contracts of mankind.” 50 But a large inequality of exchange combined with inequality of bargaining power,”’ the twin criteria adopted by the modem Canadian cases,”* goes a long way to suggest a case for relief. It is not said to be conclusive, but to cast an onus on the party seeking to uphold the tran~action,”~ an onus that might possibly be discharged on a showing that the disadvantaged party was independently advised, or that he knew of the comparative values and intended a part gift. On the other hand, not every case lends itself to analysis in terms of equality of exchange and in some cases there may be grounds for relief even when the values exchanged are approximately equal.55 The Supply of Goods (Implied Terms) Act 1973 offers a list of criteria to guide the courts in determining what exemption clauses are fair and rea~onable.~~ The list is not exhaustive, and, no doubt, further criteria will be judicially developed. I would readily recognise that the adoption of a principle of unconscionability is a mere beginning, but I would maintain that it is a useful beginning.

There will be a need for development of bars to relief. Execution in itself should not be a bar?’ but execution followed by a long delay.J8 affirmation, and intervention of third party rights might well be held to place limits on relief. The court need not choose between an all or nothing solution, but could use the power to grant relief on conditions, as the mortgage cases grant relief to the mortgagor on payment of the mortgagee’s costs.”o A condition of relief might appropriately be the payment of the other party’s reasonable expenses incurred in reliance

4 9 “ Yet it is a very material ingredient, and, with other things, will go a great way toward it ” per Clarke M.R. in How v. Weldou and Edwards (1754) 2 Ves.Sen. 516, 518. See also cases cited by Sheridan, op. cif. pp. 129-130.

80 Per Eyre L.B.C. in Grififh v Spratley (1787) 1 Cox.Ch. 383, 388. 5 1 See Supply of Goods (Implied Terms) Act 1973, s. 4, adding scction 55 (5) (a)

to the Sale of Goods Act 1893. 5 2 Supra. note 10. on p. 386. 53 See Cmwford, commeht (1966) 44 Can.Bar Rev. 1420 and see per Kay J. (1888)

40 Ch.D. 312, 322. 54 In the cases concerned with exclusion of liability for personal injury, it may be

suggested that the court is influenced by policies of accident compensation. 55 For example where an unwanted service is purchased, and other factors for

relief are preseht, it ought not to be a defence in itself that the price agreed to be paid was a reasonable price, as, for example, in Griesshammer V. Ungerer (1958) 14 D.L.R. (2d) 599, whcre a woman was persuaded to purchase dancing lessons.

36 Supra, note 36, on p. 390. 67 Sce the cases on restitution for duress, supra, notes 95-97. 518 Fox V. Mackrefh (1788) 2 Bro.Ch. 400, 427. 5 9 A third party purchasing property in good faith without notice of the plninti0“s

claim to relief would, presumably, be protected. See How v. Weldon and Edwurdr (1754) 2 Ves.Scn. 516, where it was held that notice of an inadequate price should put the third party on inquiry.

6 0 See Earl-of Aylesford v. Morris (1873) 8 Ch.App. 484, 499, Fry V. Lane (1888) 40 Ch.D. 312, 324.

.July 19761 UNCONSCIONABILITY IN CONTRACTS 393

,on the agreement, thus protecting the latter’s reliance interest, but not his contractual expectation?’

Contract law has been passing through a period of exceptional rigidity, but there are signs that it is capable of recovering its former flexibility, as, I think, it must if it is to meet the present needs of society.02

S. M. WADDAMS* ~

01 There is an analogy with cases of frustration where it equally may be just to grant relief from an agreement, but only on condition of compensating the other’s reliance, Law Reform (Frustrated Contracts) Act 1943, s. 1 (2). A similar case could be made for cohditional relief in cases of mistake.

02 Some, while accepting my general nrgument, might maintain that a general power to relieve should be introduced by legislation rather than by judicial recognition. Legislative intervention, however, tends, in practice, to be in particular fields of public concern, varying among ditIerent jurisdictions (e.g. the Chadian Provinces), thereby inevitably setting up anomalies. Moreover, my concern is as much with enforcing those agreements that are fair as with striking down those that are not, and only judicial recognition of unconsciohability as the true reason underlying a line of decisions is likely to free the courts from an over rigid judicially developed rule of invalidity. The Law Commissions’ Second Report on Exemption Clauses, 1975, Law Com. No. 69, Scot. JAW Corn. No. 9, illustrates the problems inherent in legislative reform. Tho report seems to point the way to unnecessary complexity with separate statutory rules for exemptioh clauses, varying according to defined types of transaction, and varying bctwe.cn Scotland and England. The greater willingness of the courts to undertake the reform and development of private law is strikingly illustrated by the decision of the House of Lords in MiNmgos v. George Frunk (Texliles) Ltd. [1975] 3 W.L.R. 758, espccinlly per Lord Wilberforce, pp. 772-773.

* Associate Professor, Faculty of Law, University of Toronto.

Documents

UNCONSCIONABILITY IN CONTRACTS