What Is Meant By The Term "Unconscionable Contract"?

4311 words - 17 pages

INTRODUCTIONIn the past fifteen years the concept of unconscionablitity has become a significant theme in the Australian law of contract. Liberal theories, which locate freedom of contract as central, have been tempered by an increasing emphasis on justice and conscionable conduct in contractual relations. Virginia courts have defined an unconscionable contract to be "one that no man in his senses and not under a delusion would make, on the one hand, and as no fair man would accept, on the other." In other words, the inequality present in the contract must be so gross as to "shock the conscience." The landscape for business in Australia has been dramatically altered in recent years by the legislative prohibitions of misrepresentation, undue influence and, in limited cases, unconscionable conduct.Lord Denning - "Unconscionable contract"Unconscionable contract was first developed by Lord Denning. Followings are circumstances that diverge with his thinking and the concept of conscionability need to be taken into consideration.In the court case Lloyd's Bank Ltd v Bundy [1975] QB 326,336 Lord Denning was attempting to identify an underlying "unconscionability" principle based on inequality of bargaining power.Lloyd's Bank Ltd v Bundy [1975] QB 326,336 is a case, which an elderly father gave the family farm as security for operating a business under the son's management. However the father did not know the business was in serious trouble, and the bank manager did not disclose this information to Mr. Bundy while he obtained Mr. Bundy's signature.Mr. Bundy, a long time customer of the bank, naive and tractable in financial matters and anxious to stand behind his only son, looked to the manager for advice and assistance. The farm had been in Mr. Bundy's family for generations; it was his only significant asset, and very important to him. The bank manager, completely aware of Mr. Bundy's situation, did not entirely disclose the risks involved in the transaction, and thus Bundy suffered the disadvantage as a result of inequality of bargaining power between the bank and a customer.Lord Denning stated in that case:"By virtue of 'inequality of bargaining power', the English law gives relief to one who, without independent advice, enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infancy, coupled with undue influence or pressures brought to bear on him by or for the benefit of others"Denning believed in conscionability and had based his decision in favour of Mr. Bundy on a broader principle than that adopted by the other members of the Court of Appeal. However, his approach had not been followed and indeed was specifically disapproved by Lord Scarman in National Westminster Bank v Morgan (1985).From the above case, it disclosed that the courts will set aside a contract, or...

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