Unconscionable conduct Archives

Facts of Blomley v Ryan

In 1952, Blomley’s father approached Ryan to buy his grazing property “Woorah” in New South Wales. Ryan declined to sell the property to Blomley. On several occasions, he responded that he would not be interested in selling the property soon.

Nevertheless, on 21 April 1953, Ryan signed a contract to sell his property and some chattels to Blomley for £25,000. The price was highly undervalued as compared to the prevailing market price. At the time of signing, Ryan who was 78 years old was suffering from prolonged and excessive consumption of alcohol. He had been on a drinking binge for several days. The persons present to effect the agreement (Blomley’s father, an agent, etc.) knew that he was intoxicated but still proceeded.

Later Ryan sought legal advice and decided not to complete the sale.

Blomley commenced legal proceedings against Ryan and sought specific performance of the contract in the Supreme Court of New South Wales.

The trial judge decided in favour of Ryan and Blomley appealed to the High Court.

Judgment of the Court in Blomley v Ryan

The majority of the High Court upheld the trial judge’s decision in favour of Ryan.

Though Ryan was not permanently lacking in contractual capacity due to his old age and drinking habits, at the time of the agreement, he was not in a position to make a rational decision.

The Court held that since Ryan was intoxicated and significantly influenced by alcohol at the time of signing, he couldn’t understand the contract’s nature or effect and Blomley and others were aware of this. They took advantage of Ryan’s condition to obtain his consent. Hence, the contract was invalidated on account of unconscionable conduct and was not enforceable.

Ryan was not required to fulfill his obligations under the contract. He did not have the capacity to understand the contract and Blomley took advantage of his condition.

Quote

“The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary.”

(Fullagar J at 405)

Case name & citation: Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447

Decided on: 12 May 1983
Jurisdiction: High Court of Australia
The bench of judges: Gibbs C.J., Mason, Wilson, Deane and Dawson JJ.
Area of law: Unconscionable conduct

This is one of the leading cases that widely strengthened the principle of unconscionable conduct in Australia. It further throws light on contracts where there is a power imbalance between the parties concerned.

Facts of the case (Commercial Bank of Australia v Amadio)

Giovanni and Cesira Amadio were an old couple from Italy who had moved to Australia. The Amadios had minimal business experience and a weak understanding of written English. The son of Amadios was the controlling shareholder and managing director of a building company. To cover his company’s overdraft, the son requested that they mortgage a block of shops they owned to the Commercial Bank of Australia (‘CBA’) for six months. He informed them that their legal responsibility would be limited to $50,000. The Amadios thought the business was profitable.

But in fact, the son’s company was in a difficult financial situation. Its overdraft with the CBA was overdrawn, and the CBA had dishonoured cheques approximately amounting to $45,000. On March 25, 1977, a CBA representative took the guarantee and associated mortgage documentation to the Amadios’ residence for immediate signing. He did not explain the documents to the Amadios, but he did respond to Mr. Amadio’s assertion that it was just for 6 months by clearly indicating that it was for an indefinite period of time, i.e., was unlimited. The Amadios signed the documents without seeking independent professional advice or without reviewing them.

The CBA was well aware that the son’s business was in financial trouble at the time the mortgage was signed, and that the mortgage included an unlimited guarantee by the Amadios of the company’s present and future obligations. It was also aware that the Amadios had been misled about the substance of the mortgage deed, that they had not got independent professional advice, and that they had not had the opportunity to review the documents in detail.

Later, the son’s company went bankrupt, and the CBA issued a demand under the guarantee in December 1978. The Amadios initiated legal action to set aside the mortgage and guarantee. The CBA counter-claimed to obtain the money owed to it by the son’s company.

Initial Judgment of the Court

The trial judge ruled in favor of the CBA in the first instance and ordered that the Amadios must pay an amount of $239,830.85 to CBA. On appeal, the Full Court of the Supreme Court of South Australia set aside the mortgage on the basis that the Amadios had a right to have the transaction invalidated in accordance with the equitable principles relating to unconscionable conduct. The case was then appealed to the High Court by the CBA.

Issue raised

Was the mortgage and the guarantee given by the Amadios enforceable or not?

Could it be set aside on grounds of unconscionable conduct by the CBA?

The Final decision in Commercial Bank of Australia v Amadio

On 12 May 1983, the majority of the High Court decided in favor of the Amadios.

It observed that the Amadios were at a special disability when dealing with the CBA because of their age, lack of business experience, poor English language proficiency, and complete reliance on their son.

Given that the CBA was aware of the Amadios’ disabilities, the CBA was needed to inquire as to whether the transaction had been adequately explained to the Amadios; failing to do so would have been unfair and unconscientious on the part of the CBA. Instead, the CBA went ahead and obtained the guarantee and supporting mortgage from the Amadios without such an inquiry.

The judges held that the bank representative was obligated to ensure that the Amadios understood the transaction by advising them to obtain independent professional assistance or at least giving them the opportunity to do so. This was even more important as the bank representative was aware that the Amadios had been misguided about the contents of the mortgage deed.

As a result, the Court set aside the mortgage and guarantee unconditionally. And the Amadios were not held to be bound by the mortgage.

Significance of the case

This decision serves as an authority for the idea that if a weaker party (the Amadios) can prove that they were at a special disability when dealing with a stronger party (the CBA) and that special disability was sufficiently obvious to the stronger party to render it unconscionable for the stronger party to have obtained or accepted the weaker party’s consent to the contract in the circumstances, there will be a presumption of unconscionable conduct.

Once the presumption has been established, the stronger party must demonstrate that the transaction was fair, just, and reasonable. If they are unable to do so, the contract will be voidable.

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Tag: Unconscionable conduct

Blomley v Ryan (1956): A Case Summary

Facts of Blomley v Ryan

Issue that arose

Judgment of the Court in Blomley v Ryan

Quote

Significance

Commercial Bank of Australia v Amadio (1983): A Summary

Facts of the case (Commercial Bank of Australia v Amadio)

Initial Judgment of the Court

Issue raised

The Final decision in Commercial Bank of Australia v Amadio

Significance of the case