Setting aside a contract based on Unconscionable Conduct

Setting aside a contract based on Unconscionable Conduct : Special disadvantage

The current property market, particularly in South East Queensland is affording many opportunities for parties to enter into joint venture agreements to develop land. Sometimes, one party subsequently discovers that they have been taken advantage of and want to terminate the agreement.

To set aside an agreement based upon unconscionability, a party needs to show a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands.

In the recent decision of Ah Sam v Mortimer [2021] NSWCA 327, that special disadvantage was established, and an agreement set aside.

 

Facts

The respondent Mortimer advertised for a purchaser of 50% of his property for $300,000. 

The appellant Ah Sam responded and on 21 February 2019 the parties executed a document entitled “Real Estate Sale and Purchase Agreement” for a price of $250,000. 

The agreement, which was prepared by the appellant, provided for :

  • payment of an initial $100 deposit (which was paid), 
  • a further $12,400 deposit thirty days before settlement,
  • the balance on settlement by 1 March 2020. 
  • the appellant moving into a second house on the property, 
  • a company being formed to own the property (with each party having a 50% shareholding), and 
  • both parties performing work to maximise the property’s value.

The appellant began residing on the property in March 2019. 

 

Court Action

However, relations deteriorated, and the respondent commenced proceedings in the Supreme Court:

  • seeking a declaration that the agreement was void and of no effect, 
  • pleading that he had executed the agreement involuntarily, without knowledge of its contents, and in reliance on false and fraudulent representations by the appellant.

The respondent sought orders which included setting aside the agreement for unconscionability., and alternatively a declaration of valid termination, ejectment of the appellant, and damages for trespass and lost rental income. 

The appellant cross-claimed seeking specific performance, compensation for works undertaken by him on the property, and damages for personal injury and defamation.

Ultimately, the primary judge found that the agreement was procured by the appellant’s unconscionable conduct, and made orders declaring the agreement void and of no effect and requiring the appellant to give up vacant possession. 

 

Special disadvantage and Unconscionability

On the point of unconscionability, the Court of Appeal upheld the primary judges’ decision, finding that the terms of the agreement, which were prepared by the appellant and differed from the respondent’s advertisement, were improvident from the respondent’s perspective, and this must have been apparent to the appellant, an experienced businessman. 

The facts accepted were also that respondent was suffering from very poor eyesight, and the appellant was aware of this, the respondent was unable to read the agreement, was thus not aware of its disadvantageous terms, and, in particular, did not know that the price was $250,000, not $300,000. 

These facts constituted a sufficient “special disadvantage” affecting the respondent’s ability to safeguard his interests as to support the finding of unconscionability: 

 

Adverse findings of credibility

The trial judge also was scathing of the Appellant’s honesty and credibility on trial, finding:

“He acted in my view dishonourably and dishonestly in relation to the transaction. …having observed him give his evidence I am satisfied he lied about not being at all interested in what the plaintiff was saying during their first meeting. He must in my view have summed up the plaintiff as foolish and gullible and susceptible to his charm and patter. The talk of overseas assets and a cash purchase with a man so obviously desperate as the plaintiff was a clear invitation to the plaintiff that he should feel sufficiently persuaded to accept without too much hesitation the offer over lunch. The defendant’s first offer as it were provided for a 33% discount on the asking price. Both offers were in any event to be subject to the same improvident terms from the plaintiff’s point of view so the defendant in a sense must have thought he could not lose either way. He clearly intended and clearly succeeded in having the plaintiff sign on the spot at lunch.”

and 

I regard the claim otherwise as fanciful in the extreme and contrived so as to create a set off that would enable him to avoid the payment of the purchase price. To that extent I regard the defendant as quite dishonest. I consider he told a deliberate untruth when he pretended not to be aware of the plaintiff’s infirmities and difficult financial situation. I have already expressed the view that I am satisfied he deliberately took advantage of them to advance his own interests.”

In dismissing the appeal, the Court of appeal restated the comments by Deane J, with whom Mason J and Wilson J agreed, in the key authority of Commonwealth Bank v Amadio, which described the elements that would attract relief as follows (emphasis added): 

“The jurisdiction is long established as extending generally to circumstances in which 

  1. 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 
  2. 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. 
  3. 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: ‘the burthen of shewing the fairness of the transaction is thrown on the person who seeks to obtain the benefit of the transaction.

Thus, where a party wishes to set aside a transaction on the ground that it is an unconscionable dealing, they must: 

(1) establish that there was a relevant relationship of “special disadvantage”; 

(2) establish that the other party knew and understood that they were at a special disadvantage.

The other party then bears the onus of establishing that the transaction was “fair, just and reasonable”, which involves showing either that they received full value or was independently advised. 

 

The decision demonstrates in practical terms what constitutes unconscionable conduct in a common commercial transaction. 

Of course-the action may not have taken place if the parties both had legal representation at the time of entering into the contract.

Contact us before entering into any agreement, and if you feel there is any basis for concern or termination of any existing agreements.

Michael Sing

 

The blog published by Rostron Carlyle Rojas Lawyers is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the author. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.

 

 

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