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Unconscionable Transactions,
Undue Influence and
Constructive Trusts
Assoc Prof Cameron Stewart
Purpose
• The purpose of the doctrine is to provide relief in
situations where one party to a transaction has actively
taken advantage of the weakness of the other. In this
way, equity seeks to look beyond the fiction of equality of
bargaining power that the common law takes for granted.
Pursuant to the doctrine of unconscionability, equitable
relief is given where there has been ‘an abuse of power
possessed by one party over the other by virtue of the
other’s position of special disadvantage’: Australian
Competition and Consumer Commission v Radio
Rentals Ltd (2005) 146 FCR 292, at 297.
Purpose
• In Louth v Diprose (1992) 175 CLR 621, at
638; 110 ALR 1, at 14, Deane J observed
that ‘the intervention of equity is not
merely to relieve the plaintiff from the
consequences of his own foolishness. It is
to prevent victimisation’
General or specific term?
• in Tanwar Enterprises Pty Ltd v Cauchi
(2003) 217 CLR 315 at 324-5; 201 ALR
359, at 364-5, the High Court held that
‘unconscientious’ is a more accurate term
than ‘unconscionable’ in this context
Elements
• In CBA v Amadio, at CLR 474; ALR 422, Deane J said:
• The jurisdiction is long established as extending
generally to circumstances in which (i) a party to a
transaction was under a special disability in dealing with
the other party with the consequence that there was an
absence of any reasonable degree of equality between
them and (ii) that disability was sufficiently evident to the
stronger party to make it prima facie unfair or
‘unconscientious’ that he procure, or accept, the weaker
party’s assent to the impugned transaction in the
circumstances in which he procured or accepted it.
Where such circumstances are shown to have existed,
an onus is cast upon the stronger party to show that the
transaction was fair, just and reasonable.
Elements
• Spigelman CJ in Attorney General (NSW) v World Best Holdings Ltd
(2005) 63 NSWLR 557, at 583:
• Unconscionability is a well-established but narrow principle in
equitable doctrine. It has been applied over the centuries with
considerable restraint and in a manner which is consistent with the
maintenance of the basic principles of freedom of contract. It is not a
principle of what ‘fairness’ or ‘justice’ or ‘good conscience’ requires
in the particular circumstances of the case … [R]estraint in decisionmaking remains appropriate. Unconscionability is a concept which
requires a high level of moral obloquy. If it were to be applied as if it
were equivalent to what was ‘fair’ or ‘just’, it could transform
commercial relationships … The principle of ‘unconscionability’
would not be a doctrine of occasional application, when the
circumstances are highly unethical, it would be transformed into the
first and easiest port of call when any dispute … arises
Elements
• The essential elements are, as Deane J
identifies:
• A is under a special disadvantage or
disability;
• B knew, or is likely to have known, about
that disadvantage; and
• B proceeds to use that disadvantage
unconscientiously in order to obtain A’s
consent to the transaction.
Bargaining Power
• Practical recognition of these observations can be seen in the fact
that mere inequality of bargaining power between parties does not
give rise to a situation of unconscionability. In Australian Competition
and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003)
214 CLR 51, at 64; 197 ALR 153, at 157, Gleeson CJ said:
• A person is not in a position of relevant disadvantage … simply
because of inequality of bargaining power. Many, perhaps even
most, contracts are made between parties of unequal bargaining
power, and good conscience does not require parties to contractual
negotiations to forfeit their advantages, or neglect their own interests
… Unconscientious exploitation of another’s inability, or diminished
ability, to conserve his or her own interests is not to be confused
with taking advantage of a superior bargaining position.
Timing
• In Gustav & Co Ltd v Macfield Limited [2008]
NZSC 47, at [5], the New Zealand Supreme
Court held that the appropriate time to assess
whether a conditional contract was
unconscionable was when the contract was
entered into and not when it became, or was
declared, unconditional. However, the Court, at
[21], went on to note that ‘material variations to a
contract should be examined for
unconscionability as at the date upon which they
are agreed’.
Special Disadvantage
• There is no fixed list of what constitutes a
special disadvantage. What is required is
some characteristic ‘which seriously
affects the ability of the innocent party to
make a judgment as to his own best
interests’: CBA v Amadio, at CLR 462;
ALR 413.
Special Disadvantage
• In Australian Competition and Consumer Commission v
Samton Holdings Pty Ltd (2002) 117 FCR 301, at 318;
189 ALR 76, at 92, the Full Court of the Federal Court
stated that factors going to establishing a special
disadvantage fell into one of two categories;
‘constitutional’ and ‘situational’. The court said:
• The special disadvantage may be constitutional, deriving
from age, illness, poverty, inexperience or lack of
education. Or it may be situational, deriving from
particular features of a relationship between actors in the
transaction such as the emotional dependence of one on
the other.
Knowledge
• It is clear that the defendant must have
known or ought to have known of the
special disadvantage of the other party.
The requirement of knowledge is
necessary because the defendant cannot
be said to have acted unconscientiously if
he or she had no knowledge of the
plaintiff’s special disadvantage
Unconscionable exploitation of
the disadvantage
• The stronger party must exploit the
weakness that he or she knows to exist in
the other in order to procure consent to a
transaction. Inequality of bargaining power
will often be a factor to be taken into
account in assessing whether the stronger
party has taken advantage of the weaker
party’s special disability.
Examples
• In CBA v Amadio the Amadios’ special disadvantage was
knowingly used to procure them into signing a contract of
guarantee, which was not limited by time or extent of
liability, to secure a loan to their son who was in serious
financial trouble.
• In Louth v Diprose the infatuated Diprose made a gift of
$58,000 to Louth so that she could purchase a house.
• In Blomley v Ryan the drunken Ryan sold his entire
landholding to Blomley at a price described by
McTiernan J, at 392, as ‘strikingly disproportionate’ to the
estimated market value.
Legislation
• The federal, state and territory legislatures
have all enacted legislation which deal
with unconscionable conduct and/or
related concepts dealing with what might
generally be referred to as unfair conduct.
Legislation
• In Part IVA of the Trade Practices Act, entitled ‘Unconscionable
Conduct’, ss 51AA, 51AB and 51AC deal with statutory forms of
unconscionability. In all three sections there are prohibitions against
corporations, in the course of trade or commerce, engaging in
unconscionable conduct. The need for a corporation to be involved
is a consequence of the federal government’s limited legislative
power under s 51 of the Commonwealth Constitution. The federal
government must have a legitimate grant of power in order for its
laws to be valid. The trade and commerce power (s 51(i)) presents
problems as it specifically precludes federal legislation in intrastate
matters, hence recourse to the more amenable corporations power
(s 51(xx)), which will apply to intrastate matters so long as a
sufficient connection to corporations may be found.
Legislation
•
Section 51AAB of the Act stipulates that ss 51AA and 51AB do not apply to conduct involving
financial services. However, the provisions of ss 51AA, 51AB and 51AC are replicated, in relation
to financial services, in ss 12CA, 12CB and 12CC of the Australian Securities and Investments
Commission Act 2001 (Cth). In order to cover cases where the conduct is not within the provisions
of either of these two federal acts, complementary legislation is found in some states and
territories that may enable an applicant to seek relief. Section 51AA is replicated only in
Victoria.[1] Section 51AB is replicated in all states and territories.[2] Section 51AC has been
replicated in Tasmania and Victoria,[3] as well as in retail leases legislation in all states and
territories, with the exception of South Australia.[4]
•
•
•
•
[1] Fair Trading Act 1999 (Vic) s 7.
[2] Fair Trading Act 1992 (ACT) s 13; Fair Trading Act 1987 (NSW) s 43; Consumer Affairs and
Fair Trading Act 1990 (NT) s 43; Fair Trading Act 1989 (Qld) s 39; Fair Trading Act 1987 (SA) s 57;
Fair Trading Act 1990 (Tas) s15; Fair Trading Act 1999 (Vic) s 8; Fair Trading Act 1987 (WA) s 11.
[3] Fair Trading Act 1990 (Tas) s 15A; Fair Trading Act 1999 (Vic) ss 8A and 8B.
[4] Leases (Commercial and Retail) Act 2001 (ACT) s 22; Retail Leases Act 1994 (NSW) ss 62A
and 62B; Business Tenancies (Fair Dealings) Act, 2003 (NT) ss 79 and 80; Retail Shop Leases
Act 1994 (Qld) ss 46A and 46B; Fair Trading (Code of Practice for Retail Tenancies) Regulations
1998 (Tas) Cl 3; Retail Leases Act 2003 (Vic) ss 77 and 78; Commercial Tenancy (Retail Shops)
Agreements Act 1985 (WA) ss 15C and 15D.
Legislation
• it is clear that the notion of unconscionable
conduct under ss 51AB and 51AC is
broader than unconscionable conduct in
equity: Australian
Competition
and
Consumer Commission v Simply NoKnead (Franchising) Pty Ltd (2000) 104
FCR 253, at 265; 178 ALR 304, at 315;
Canon Australia Pty Ltd v Patton (2007)
244 ALR 759, at 767-9.
Legislation
• In ACCC v Samton Holdings, at FCR 317; ALR 91, the court
identified the following four ways in which unconscionable conduct
has been used in the case law:
• 1. As an organising idea informing specific equitable rules and
doctrines which do not in terms refer to, or require, an explicit finding
of unconscionable conduct - eg rules on stipulations as to time and
notices to complete.
• 2. In relation to specific equitable doctrines of which estoppel,
unilateral mistake, relief against forfeiture and undue influence are
examples. They are united by the idea that equity will prevent an
unconscionable insistence on strict legal rights and are conditioned
upon the explicit finding of unconscionable conduct in the persons
against whom they are invoked.
• 3. In relation to the discrete doctrine of unconscionable dealing
which concerns one species of unconscionable conduct.
• 4. In relation to unconscionable conduct founding a cause of action
not mediated by any discrete doctrine.
Undue Influence
• Whereas the common law has traditionally
assumed that the parties to particular
transactions have equal bargaining power,
equity recognises that often this may not
be the case and it may enable a party to
set aside a transaction where it can be
shown that the relationship between the
parties was tainted by inequality,
unfairness or actual abuse.
Undue Influence
• In equity, the principle of undue influence also
focuses on the quality of consent given to the
transaction. This was made clear by Deane J in
Commercial Bank of Australia Ltd v Amadio
(1983) 151 CLR 447, at 474; 46 ALR 402, at
423, when he said that ‘[u]ndue influence, like
common law duress, looks to the quality of the
consent or assent of the weaker party’. The
purpose of the doctrine of undue influence is ‘to
protect people from being forced, tricked or
misled in any way by others into parting with
their property’: Allcard v Skinner, at 182-3.
Undue Influence
• It is clear that the doctrines relating to unconscionable transactions
and undue influence are closely related. But just how closely is a
matter of some debate. Hardingham, while making it clear that he
was not advocating a ‘general unifying principle of universal
application’, made the following statement:
• [T]he boundaries between traditional heads of intervention against
unconscionable behaviour — specifically between common law
duress and actual undue influence or pressure, between presumed
undue influence and unconscionable dealing as such — are shifting.
Lines of demarcation are not now as clearly defined as they may
have been in the past. As a consequence, the traditional heads
themselves may be ready for some redefinition or rationalisation.[1]
•
[1] I Hardingham, ‘Unconscionable Dealing’ in P D Finn (ed), Essays
in Equity, Law Book Co, Sydney, 1985, 1, p 2.
• The classic statements in this regard are both
derived from Commercial Bank of Australia v
Amadio (1983) 151 CLR 447; 46 ALR 402. In
that case, Deane J said, at CLR 474; ALR 423:
• Undue influence, like common law duress, looks
to the quality of the consent or assent of the
weaker party … Unconscionable dealing looks
to the conduct of the stronger party in attempting
to enforce, or retain the benefit of, a dealing with
a person under a special disability in
circumstances where it is not consistent with
equity or good conscience that he should do so.
Categories of Undue Influence
• Traditionally there have existed two distinct categories of
transactions that attract equitable intervention on the
basis of the principles of undue influence. The
distinguishing characteristic between the two categories
is whether there is, or is not, a special relationship
between the parties to the transaction. Cases in which
there is no special relationship between the parties are
generally referred to as ones of actual or express undue
influence. Cases in which a special relationship exists
between the parties, are generally referred to as ones of
presumed undue influence, and can be sub-categorised
according to the basis upon which the existence of the
special relationship is established
Actual Undue Influence
• In cases where there is no special
relationship between the parties to the
transaction, a person seeking equitable
relief on the basis of the principles of
undue influence must establish that actual
undue influence was exerted by the other
party to the transaction
Actual Undue Influence
• In Johnson v Buttress (1936) 56 CLR 113, at
134, in discussing such cases, Dixon J said:
• The source of power to practise such a
domination may be found in no antecedent
relation but in a particular situation, or in the
deliberate contrivance of the party. If this be so,
facts must be proved showing that the
transaction was the outcome of such an actual
influence over the mind of the alienor that it
cannot be considered his free act.
Actual Undue Influence
• Cases of actual undue influence are uncommon. They
are also difficult to prove. Thus, in Frederick v State of
South Australia (2006) 94 SASR 545, a South Australian
magistrate resigned from his position during a meeting
with the Chief Magistrate. The magistrate had been
recently convicted of two criminal offences. However, the
convictions were subsequently set aside. The magistrate
argued that the resignation was ineffective on the basis
that it was procured by the exertion of actual undue
influence by the Chief Magistrate. The Supreme Court
rejected the claim on the basis that the magistrate, as a
person who had had a long career as a lawyer and
magistrate, was not in a position of being the victim of
actual undue influence.
Actual Undue Influence
•
•
White J, at 580, said the following in relation to the magistrate’s decision to
resign:
I accept that [he] valued his position as a magistrate both for the honour
which the office entailed, his satisfaction with the work and because it was
his source of livelihood. I accept that [he] wished to maintain his position as
long as practicable and that he signed the resignation letter reluctantly. I
accept that immediately before signing the resignation letter he said words
to the effect that he felt that he did not really have any choice but to resign
with dignity, and that that statement reflected his state of mind at that time.
However, that evidence falls short, in my opinion, of establishing that [his]
will was overborne or that his agreement to resign was procured by undue
influence. The fact that the choices apparently open to him were
unpalatable does not indicate that his will was overborne. It is an
unfortunate fact that often people are called upon to make difficult decisions
and, in particular, to make decisions which they would prefer very much not
have to make. Where a person confronts the circumstance, and makes the
difficult decision, it will often be inappropriate to speak of their will having
been overborne. In my opinion, that is the position in the present case.
Presumed Undue Influence
• The existence of the special relationship gives
rise to a presumption that the transaction was
obtained as a result of undue influence by the
stronger party in the relationship over the
weaker party. The presumption of undue
influence only arises upon proof of the existence
of a special relationship. The effect of the
presumption is that the weaker party will be able
to seek equitable relief, unless the presumption
of undue influence is rebutted by the stronger
part
• Class 2A and 2B
Presumed Undue Influence
• Class 2A include those existing between:
• parent and child: Lancashire Loans Ltd v Black
[1934] 1 KB 380;
• guardian and ward: Hylton v Hylton (1754) 28
ER 349;
• solicitor and client: Westmelton (Vic) Pty Ltd v
Archer & Shulman [1982] VR 305;
• doctor and patient: Bar-Mordecai v Hillston
[2004] NSWCA 65; and
• religious leader and follower: Allcard v Skinner.
Presumed Undue Influence
• In Royal Bank of Scotland v Etridge, at AC 797;
All ER 460, Lord Nicholls asserted that a
presumption arising by virtue of a recognised
class of relationship is ‘irrebuttable’. This
approach has, however, been rightly rejected in
Australia: Janson v Janson [2007] NSWSC
1344, at [93]. However, it is difficult to rebut such
a presumption and even being able to explain
the relationship in some other way, such as that
the parties were also in a de facto relationship,
will not guarantee success: Bar-Mordecai v
Hillston, at [149]..
Presumed Undue Influence
• There are suggestions that the trustee-beneficiary relationship is a
Class 2A relationship: Union Fidelity Trustee Co of Australia Ltd v
Gibson [1971] VR 573, at 577, and Johnson v Buttress, at 119.
However, as Meagher, Heydon and Leeming[1] observe, there is no
justification, in the absence of special circumstances, for suggesting
that there is a relationship of undue influence between a trustee and
beneficiary, and that unless the transaction is one involving trust
property, there should be no presumption invalidating the
transaction. In cases where trust property is involved, a beneficiary
is already protected by the rules relating to fiduciary obligations
[1] R Meagher, D Heydon & M Leeming, Meagher Gummow &
Lehane’s Equity, Doctrines and Remedies, 4th ed, LexisNexis
Butterworths, Sydney, 2002, pp 513-4.
Class 2B
• If the parties to the transaction do not fall within
a Class 2A relationship, a special relationship
can nevertheless be established on the
particular facts and circumstances of their
relationship. These Class 2B relationships arise
‘where it is proved that the party benefiting from
the transaction occupies or assumes towards
another a position naturally involving an
ascendancy or influence over that other, or a
dependency or trust on the latter’s part’: Janson
v Janson [2007] NSWSC 1344, at [72].
Example
• In Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30,
Bester, as a young woman, was encouraged to make a
settlement of a substantial inheritance received from her
father. The effect of this irrevocable document was to put
the assets, which comprised her inheritance, beyond her
control and provide her with only a modest annual
income from the property. At the time of settlement,
Bester was 21 years of age, without parental guidance
and possessed of extremely limited business
experience. She was influenced by three much older
men — the representative from her trustee company,
and her two uncles, one of whom was the solicitor who
drafted the deed of settlement. In these circumstances,
Street J had little difficulty in finding that undue influence
was raised successfully by Bester who was, after many
years, seeking to rescind the settlement. His Honour, at
34–5, said:
Example
• The present relationship is very close to, if not indeed,
within, the scope of the traditional relations. But whether
within or without the traditional relations, the present
facts involve a degree of confidence equivalent thereto
… Indeed, the very presence, in the circumstances
surrounding this deed, of the paternal element that
pervades the discussions between all concerned is
consistent with, and corroborates, the existence of the
special relationship of influence.
Rebuttal
• Once the applicant has satisfied the court that there is a
case of actual undue influence or the existence of a
special relationship of influence, the stronger party to the
transaction has the task of rebutting the presumption that
the transaction was the result of undue influence. The
aim of the stronger party is not necessarily to rebut the
nature of the relationship but rather to focus upon
proving that ‘the gift was the independent and wellunderstood act of a man in a position to exercise a free
judgment based on information as full as that of the
donee’: Johnson v Buttress (1936) 56 CLR 113, at 134.
This test is not satisfied simply by establishing that the
donor understood the transaction: Bar-Mordecai v
Hillston [2004] NSWCA 65, at [167], [183].
Yerkey
• Yerkey v Jones, Mr and Mrs Yerkey brought a claim against Mr and
Mrs Jones that arose out of a mortgage over real property. Mr and
Mrs Jones entered into a contract for the purchase of a poultry farm
at Payneham near Adelaide. The purchase price was to be paid in
instalments. However, it was a condition that part of the purchase
price be secured by way of a second mortgage over another
property owned by Mrs Jones. Mr Jones negotiated the sale
conditions with Mr Yerkey and it was not until a week after agreeing
to buy the property that Mr Jones advised Mrs Jones that he had
agreed to buy the Payneham property and that he might get into
trouble if Mrs Jones did not provide a mortgage over her property.
Shortly thereafter Mrs Jones gave a second mortgage as was
requested. Mr and Mrs Jones received advice from Mr Yerkey’s
solicitors. Subsequently, Mrs Jones took proceedings to have the
mortgage set aside.
Yerkey
• Although the High Court denied Mrs Jones any equitable
relief, the judgment of Dixon J is important in that it
articulates the existence of a special equity that protects
the position of a wife acting as a guarantor in relation her
husband’s debts. Dixon J, at 678, said:
• Although the relation of husband to wife is not one of
influence, yet the opportunities it gives are such that if
the husband procures his wife to become surety for his
debt a creditor who accepts her suretyship obtained
through her husband has been treated as taking it
subject to any invalidating conduct on the part of her
husband even if the creditor be not actually privy to such
conduct
Yerkey
• in Garcia v National Australia Bank (1998) 194 CLR 395; 155 ALR
614, the majority of the High Court dramatically re-affirmed the
principle in Yerkey v Jones. In that case a married woman and her
husband executed a mortgage in 1979 in favour of the National
Australia Bank that was secured over their matrimonial home. The
mortgage not only secured all money owing under the mortgage, it
also secured any money owing pursuant to future guarantees given
by either the husband or the wife to the bank. Between 1985 and
1987, the wife signed several guarantees relating to loans made to
businesses conducted by the husband. There was no explanation of
the precise extent of these transactions by the creditor to the wife.
Although she was a capable and professional woman who had her
own business as a physiotherapist, she did not realise that the
guarantees were also linked to the mortgage entered into in 1979.
Importantly, the wife obtained no personal benefit from the
transactions. In 1989, the woman and her husband were divorced
and she commenced proceedings to have the guarantees set aside.
Yerkey
• The High Court majority, in setting aside the
guarantees, found that, despite there being no
actual undue influence by the husband, it was
nevertheless unconscionable for a creditor to
enforce a guarantee in such circumstances. The
High Court majority noted that there were two
possible ways in which a wife in such
circumstances could seek equitable relief. The
first is where there is actual undue influence by a
husband over a wife and the second is where, in
the absence of actual undue influence, the
Yerkey v Jones principle applies. .
Constructive trusts to remedy
unconscionable conduct
• Muschinski v Dodds (1985) 160 CLR 583
• Baumgartner v Baumgartner (1987) 164
CLR 137
Constructive trusts to remedy
unconscionable conduct
• Turner v Dunne [1996] QCA 272 at 4–5 as:
• 1. A constructive trust may be imposed even though
the person held to be trustee had no intention to
create a trust or hold property on trust.
• 2. An intention to create a trust may be imputed
where it is necessary to do so ‘in good faith and in
conscience’.
• 3. A principle which may be applied is that which
restores to a party contributions made to a joint
endeavour which fails, when the contributions have
been made in circumstances in which it was not
intended that the other party should enjoy them.
• 4. Contributions, financial and otherwise, to the
purposes of the jointed relationship are relevant for
this purpose.
Constructive trusts to remedy
unconscionable conduct
• Turner v Dunne [1996] QCA 272 at 4–5 as:
• 1. A constructive trust may be imposed even though
the person held to be trustee had no intention to
create a trust or hold property on trust.
• 2. An intention to create a trust may be imputed
where it is necessary to do so ‘in good faith and in
conscience’.
• 3. A principle which may be applied is that which
restores to a party contributions made to a joint
endeavour which fails, when the contributions have
been made in circumstances in which it was not
intended that the other party should enjoy them.
• 4. Contributions, financial and otherwise, to the
purposes of the jointed relationship are relevant for
this purpose.
The effect of legislation on
constructive trusts in the family
context
• Section 79 of the Family Law Act 1975
(Cth)
• Property (Relationships) Act 1982 (NSW)
• In New South Wales the definition of de
facto relationships includes all relationships between two adult persons who
live together as a couple on a genuine
domestic basis
The effect of legislation on
constructive trusts in the family
context
• The ACT, New South Wales and Tasmania
have expanded their legislative regimes to
include claims made by parties in
‘domestic relationships’ (in ACT and NSW)
and ‘personal relationships’ (in Tasmania)
The remaining importance of equity
•
•
•
•
Not all relationships
Equity preserved
Deceased parties
Third parties