La1106 – Exam Notes

Lecture 11

Impropriety by third parties

If undue influence has been exercised by a third party to the contract, the weaker party may be able to rescind the contract

• 
  Bank of NWS v Rogers (1941) 65 CLR 42
  

Sexually transmitted debts

• 
  Presumed knowledge of undue influence
  
• 
  It should be assumed that the husband has exercised undue influence over the wife, and so the wife should have the right to set aside any properties put up as a guarantor for her husband
  
• 
  Precedent set in Yerkey v Jones (1940) 63 CLR 649
  
• 
  Reaffirmed in Garcia v National Australia Bank Limited (1998) 194 CLR 395
  
  • 
    She was not getting any benefit from the transaction
    
  • 
    The bank knew that Mrs Garcia was in a relationship with trust and confidence with her husband and that Mr Garcia did not make her aware of the extent of the transaction
    
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  Controversial that it was reaffirmed
  
• 
  Garcia case has been criticised
  
• 
  Barclay’s Bank plc v O’ Brien [1994] 1 AC 180 & Royal Bank of Scotland v Etridge [2002] 2 AC 773
  
  • 
    If the bank knows or ought to know that the wife’s consent has been procured by undue influence, it may not rely on her consent unless it has a good reason to believe that she understands the nature and effect of the transaction.
    
  • 
    A good reason would be found where the bank is aware that the wife has received independent legal advice or advice from a bank staff.
    
  • 
    The bank needs to take reasonable steps to satisfy itself that the wife understands the nature and effect of the transaction.
    
  • 
    The bank should disclose to the wife or her solicitor the amount of relevant indebtness.
    

Unconscionability

• 
  Unconscionability is a general concept that underpins equity
  
• 
  More common than other reasons for having contracts set aside, i.e. undue influence
  
• 
  A harsh contract with unfair terms will not necessarily be set aside for unconscionability
  
• 
  Not to rectify foolishness, but to prevent victimisation
  

• 
  An unconscionable dealing occurs when one party has exploited or taken undue advantage of another’s special disadvantage.
  

Elements:

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  One party is suffering from a special disadvantage
  
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  The other party is aware of this and takes advantage of it
  
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  The other party cannot show that the transaction was fair, just and reasonable
  

• 
  Commercial Bank of Australia v Amadio (1983) 151 CLR 447
  

• 
  Amadio’s were guarantors for their son’s property
  
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  They were at a special disadvantage
  
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  The bank were wilfully ignorant to the obvious disadvantage
  
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  The court found that the Amadio’s may not have signed the documents at all should they
  

Different focus to undue influence

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  What is important to undue influence is the quality of the consent if any of the weaker party
  
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  Unconscionability is when a stronger party knows about a weakness and exploits it
  
• 
  Should consider both remedies in exam/tutorial questions
  

Special disadvantage

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  ‘[The circumstances adversely affecting a party include] poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy, or lack of assistance or education where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other.’
  
  • 
    Blomley v Ryan (1956) 99 CLR 362, 405 (Fullagar J)
    
• 
  This list is not closed however. Constitutional and situational factors must be considered
  
  • 
    Davey v Challenger [2003] NSWCA 172.
    
    • 
      Age of parents alone cannot be considered a special disability
      
    • 
      It would not be appropriate if the court considered age and pensioner status as limiting parents from helping their children
      
• 
  A poor commercial bargaining position is not a special disadvantage
  
• 
  A special disadvantage is when a person is so disadvantaged that they’re unable to make a rational decision about their own best interests
  
• 
  Emotional dependency can be classed as a special disadvantage
  
  • 
    Louth v Diprose (1992) 15 CLR 621.
    
    • 
      Emotion dependency was successfully argued
      
  • 
    Bridgewater v Leahy (1998) 194 CLR 457.
    
  • 
    The person is so emotionally dependent on the other that they are vulnerable to exploitation by that other
    
• 
  Inequality of bargaining power
  
  • 
    ACCC v Berbatis Holdings (2003) 214 CLR 51.
    
  • 
    Unequal bargaining power does not mean special disadvantage has occurred
    
  • 
    Most contracts likely are between people of unequal power, and good conscience does not require parties to forfeit their advantages or neglect their own interests
    

Knowledge of the disability

• 
  Actual knowledge or willful ignorance
  
  • 
    Commercial Bank of Australia v Amadio (1983) 151 CLR 447
    
• 
  Incomplete knowledge can be enough
  
  • 
    Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413.
    

Rebuttal

• 
  Defendant must prove that
  
  • 
    Transaction is in fact fair, and/or
    
  • 
    Plaintiff received independent legal advice
    

Remedies

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  Rescission
  
• 
  Bars to rescission
  
  • 
    Refusal to grant specific performance
    
  • 
    ‘Practically just’ outcome
    
    • 
      Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102
      

Statutory provisions

• 
  Competition and Consumer Act 2010 – Schedule 2: ACL.
  
  • 
    ss 20 – 22: Unconscionable conduct
    
  • 
    Remedies: ss232 – 238
    
    • 
      Injunctions
      
    • 
      Damages
      
    • 
      Compensation orders
      
  • 
    Note also: ss 23 – 25: Unfair terms of consumer contracts.
    

Lecture 12

Illegality

The law also sets a limit by declaring that certain contracts shouldn’t be entered into at all – When the contract would have a detrimental effect of society as a whole

Considered antisocial and inconsistent with public policy

• 
  A contract will be illegal if it is inconsistent with public policy manifest in common law or statute
  
• 
  2 types of illegal contracts:
  
  • 
    Strictly illegal
    
    • 
      Void
      
    • 
      Illegal under statute or common law
      
  • 
    Unenforceable
    
• 
  Affect the rights of the actual parties in the contracts
  

Consequence

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  Unenforceable
  
• 
  It would be unreasonable for anyone to benefit from a contract that is considered antisocial
  
• 
  ‘… No court will lend its aid to a man who founds his cause upon an immoral or illegal act…’ - Lord Mansfield in Holman v Johnson (1775) 1 Cowp 341, 343.
  

Note difference with frustration – it is a supervening event. The contract becomes illegal, and the contract is valid until it is frustrated. For illegality, the contract is entered into at such a time in which the contract was expressly or impliedly illegal at common law or under statute, so the contract is never considered valid and could not have been enforced.

Pleading illegality

• 
  Generally a defence against a lack of performance
  

4 kinds of statutory illegality

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  Contract illegal as formed
  
  • 
    The contract is itself illegal (expressly or impliedly) under the statute;
    
  • 
    The contract purports to do something that is illegal under statute.
    
• 
  Contract illegal as performed
  
  • 
    The contract is legal but it is made with the intention of effecting an unlawful purpose;
    
  • 
    The contract is legal but it is intended, at least by one party, to perform it in an illegal manner.
    
    • 
      Yango Pastoral Co Pty Ltd v First Chicago Aust Ltd (1978) 139 CLR 410, (Gibbs ACJ, 413)
      

Express statutory illegality

• 
  A stature expressly states that such a contract cannot be entered into
  
• 
  Contract is invalid and/or penalty imposed
  
  • 
    Mahmoud v Ispahani [1921] 2 KB 138
    
  • 
    Competition and Consumer Act 2010 (Cth) section 45
    

Implied statutory illegality

• 
  If the prohibition is not expressly prohibited by the statute, it may be implied
  
  • 
    Did it mean to prohibit this type of contract, or did it mean to simply regulate certain behaviours?
    
• 
  Determined by assessing parliament’s intention
  
• 
  Court is reluctant to find implied prohibition
  
• 
  Courts use forward and backward reasoning
  
  • 
    Backward reasoning – courts consider what the consequences would be if the contract was found to be illegal, and on that basis make their decision
    
  • 
    Forward reasoning – courts consider the contract, and make the decision of whether it is illegal
    

Yango Pastoral Co Pty Ltd v First Chicago Aust Ltd (1978) 139 CLR 410

• 
  The statute did not have an express prohibition
  
• 
  Court needed to decide whether it was impliedly illegal
  
• 
  Mason J: ‘... The question is whether the statute intends merely to penalise the person who contravenes the prohibition or whether it intends to go further and prohibit contracts the making of which constitute the carrying on of the business. In deciding this question, the court will take into account the scope and purpose of the statute and the consequences of the suggested implication with a view to ascertaining whether it would conduce to, or frustrate, the object of the statute.’
  
• 
  Backward reasoning applied
  
• 
  Court found that the penalty within the act was sufficient to promote the intended purpose of the act and there was no need for the contracts made by the bank to be regarded as illegal as well
  
• 
  Court found that the contract was not prohibited
  

What factors does the court consider?

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  Scope and purpose of the Act.
  
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  Consequences of finding the contract illegal.
  
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  Any penalty existing under the Act.
  
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  Whether the action prohibited by the statute is at the core of the contract
  
  • 
    Burmic Pty Ltd v Goldview (2003) 2 Qd R 477
    

Incidental illegality

• 
  Something done at the performance of the contract that was not intended at the formation of the contract
  
• 
  This will not be sufficient to find that the contract is void
  
  • 
    St John Shipping Corp v Joseph Rank [1957] 1 QB 267
    
    • 
      Ship owners were fined as they breached the act, but the contract remained intact
      
    • 
      There is a distinction between a contract that has at its object the very forbidden act at the contract, and a contract who’s performance contains only an incidental illegality
      

Illegality at common law

• 
  Because inconsistent with public policy
  
• 
  Court must weigh competing public interests
  
• 
  List of categories is not closed
  
• 
  Categories:
  
  • 
    1. Contracts to commit a crime, tort, or breach of statute
    
    • 
      North v Marra Developments Ltd (1981) 148 CLR 42.
      
    • 
      Nelson v Nelson (1995) 184 CLR 538
      
      • 
        Can be void even if the parties don’t know the acts are illegal
        
      • 
        The court can refuse to enforce the contract but only if:
        
        • 
          The breach was serious and non enforcement is proportionate with breach
          
        • 
          Non-enforcement is necessary to protect the object of the act or policy
          
        • 
          The statute does not state that non-enforcement is not available consequence.
          
    • 
      Fitzgerald v Leonhardt Pty Ltd (1997) 189 CLR 215
      
      • 
        The contract was not expressly or impliedly illegal; there was a requirement of a permit to drill the holes, and a specified fine that should be paid if the permit was not obtained
        
      • 
        Therefore, the contract was still intact, and Fitzgerald was fined as per the legislation
        
      • 
        Fitzgerald would have been unjustly enriched
        
  • 
    2. Contracts which prejudice the administration of justice
    
    • 
      Callaghan v Sullivan [1925] VLR 664.
      
  • 
    3. Contracts which promote corruption in public life
    
    • 
      Wilkinson v Osborne (1915) 21 CLR 89.
      
  • 
    4. Contracts promoting sexual immorality
    
  • 
    5. Contract to defraud the revenue
    
  • 
    6. Contracts infringing the laws of a foreign country
    
  • 
    7. Contracts imposing servitude
    
  • 
    8. Contract prejudicial to the status of marriage
    
  • 
    9. Contracts excluding the jurisdiction of the courts
    
    • 
      Baker v Jones [1954] 2 All ER 553.
      
    • 
      Scott v Avery (1856) 5 HLC 811.
      
  • 
    10. Contracts in restraint of trade
    
    • 
      The restraint is reasonable if it goes no further than what is necessary – must not go further than protecting the legitimate business interests of the other party. Must be reasonable in scope and duration.
      
      • 
        Employment contracts
        
        • 
          Buckley v Tutty (1971) 125 CLR 353
          
      • 
        Sale of business
        
        • 
          Nordenfeldt v Maxim Nordenfeldt Guns and Ammunition Co Ltd [1894] AC 535.
          
          • 
            Restrictions may be tighter than employment due to goodwill component
            
          • 
            Allowed the 25 years in America and Europe restraint of trade
            
      • 
        Exclusive dealings
        
        • 
          Amoco Australia v Rocca Bros Motor Engineering Co (1973) CLR 288.
          

Consequences of illegality

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  1. Severance
  
  • 
    Severing the void clause will only happen if it would not destroy the sense and purpose of the contract as a whole
    
• 
  2. Unenforceability
  
  • 
    Seriousness of illegality:
    
    • 
      Strictly illegal contract – void and unenforceable
      
    • 
      Unenforceable contract
      
  • 
    Neither party can enforce rights, except if:
    
    • 
      The parties are not equally at fault – the court will try to protect the rights of the innocent
      
    • 
      Misrepresentation
      
      • 
        If a party is mislead into thinking the contract would be legal, they may be able to get damages in deceit
        
  • 
    Alternatives
    
    • 
      Nelson v Nelson (1995) 184 CLR 538.
      
      • 
        The court should not refuse legal or equitable rights simply because they arose from an unlawful purpose, unless the statute discloses that those rights should then be unenforceable
        
• 
  3. Non-retrieval
  
  • 
    Exceptions:
    
    • 
      No guilt – in some circumstances the less guilty party may recover
      
    • 
      Statute aiming to protect a class
      
      • 
        If someone is in a class that the statute is aiming to protect, then they can recover
        
      • 
        Kirri Cotton v Dewani [1960] AC 192.
        
        • 
          The statute is intended to protect tenants, and it was the responsibility of the landlord to ensure the legality of the transactions
          

• 
  Repentance
  
  • 
    Repenting needs to be done before the purpose of the contract is substantially achieved
    
  • 
    Does not have to be sincere