Introduction
In Canada, with the exception of the province of Quebec which operates under a civil law regime, the laws of the provinces and territories are derived from two sources: either some level of government by enactment, or by adoption through continuation of the old English law. The old English law was composed of the rules of common law and the rules of equity. Where there was a conflict between these rules with reference to the same matter, the rules of equity prevail.
Generally speaking, in the case of a contract situation, once a contract has been signed by the parties, it forms a binding agreement. Should one party default in carrying out his or her obligations under the contract, the non-defaulting party could take the matter before a court and seek enforcement of their contractual rights. The court would grant the relief sought based upon the rules of the common law. This is so, unless the conduct of the non-defaulting party towards the defaulting party at the time that the contract was entered into involved circumstances which would label the transaction as “unconscionable”. In such a situation, the defaulting party could then raise the equitable principle of inequality of bargaining power, which is merely, “an updated version of the traditional notion of what is unconscionable” as a legal defence to enforcement of the contract.
The basic premise of this principle is that where the evidence discloses that a transaction is unconscionable and improvident on its face, the court will invoke the equitable principle, “that a person who is not equal to protecting himself will be protected, not against his own folly or carelessness, but against his being taken advantage of by those in a position to do so by reason of their commanding and superior bargaining position”. It is this combination of inequality of position and improvidence that is the foundation upon which this equitable principle is based.
Principle of Inequality of Bargaining Power
Where the court exercises the equitable principle of inequality of bargaining power, the defaulting party will be released from its obligations under the unconscionable contract. In determining whether there exists an inequality of bargaining power between the contracting parties, the court may consider such factors as the relative financial, economic, or intellectual strengths or capacities of the parties. In particular, a lack of business experience, limited education, ignorance of the true effect of the transaction, or a lack of independent advice on the part of the plaintiff are all factors which, if proven to exist, may relieve the defaulting party from the contractual obligations.
The nature and scope of the equitable principle of inequality of bargaining power was aptly summarized in the 1978 case of Harry v. Kreutziger as follows:
“The principles upon which a court will interfere with a concluded transaction and nullify it upon the ground that it is unconscionable have found frequent expression. An early Canadian case is Waters v. Donnelly (1984), 9 O.R. 391. The leading pronouncement on the subject in British Columbia is to be found in Morrison v. Coast Finance Ltd. (1965), where Davey J.A. said at p. 259:
The equitable principles relating to undue influence and relief against unconscionable bargains are closely related, but the doctrines are separate and distinct. The finding here against undue influence does not conclude the question whether the appellant is entitled to relief against an unconscionable transaction.
A plea of undue influence attacks the sufficiency of consent; a plea that a bargain is unconscionable invokes relief against an unfair advantage gained by an unconscientious use of power by a stronger party against a weaker. On such a claim the material ingredients are proof of inequality in the position of the parties arising out of the ignorance, need or distress of the weaker, which left him in the power of the stronger, and proof of substantial unfairness of the bargain obtained by the stronger. On proof of those circumstances, it creates a presumption of fraud which the stronger must repel by proving that the bargain was ‘fair, just and reasonable’”: Aylesford (Earl) v. Morris (1873), or perhaps by showing that no advantage was taken: See Harrison v. Guest (1855) [where] Kay, J. Accurately stated the modern scope and application of the principle, and discussed the earlier authorities upon which it rests. He said at p. 322:
The result of the decisions is that where a purchase is made from a poor and ignorant man at a considerable under-value, the vendor having no independent advice, a Court of Equity will set aside the transaction.
This will be done even in the case of property in possession, and a fortiori if the interest be reversionary. The circumstances of poverty and ignorance of the vendor, and absence of independent advice, throw upon the purchaser, when the transaction is impeached, the onus of proving, in Lord Selborne’s words, that the purchase was “fair, just, and reasonable.”
The test for establishing whether a contract can be termed “unconscionable” will require a finding of the following:
1. A grossly unfair and improvident transaction;
2. The victim’s lack of independent legal advice or other suitable advice;
3. An overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and
4. The other party’s knowingly taking advantage of this vulnerability.
1. Grossly Unfair and Improvident Transaction
An example of a situation involving a grossly unfair and improvident transaction is the 1996 case of Pike v. Pike. The parties married in 1986, separated in February 1995, and divorced in August 1995. The husband’s father had conveyed the matrimonial home to the parties in December 1992 as a gift. The wife testified that she had not known that the home had been legally transferred to both herself and her husband. At the request of the husband’s father, the wife prepared a handwritten document, before executing the separation agreement, acknowledging that she was making no claim to an interest in the home. In February 1995, the father picked up the separation agreement from the husband’s solicitor and then drove the wife to her lawyer’s office, where she signed the agreement. At that time she believed that the house was in the father’s name. Under the agreement, she agreed to convey her interest in the matrimonial home to her husband for $3,725. A 1996 appraisal placed a market value of $53,500 on the home. The wife also executed a conveyance to the husband, providing that they were the owners of the matrimonial home. One week after signing the separation agreement, the wife brought an action to have the transfer of the matrimonial home to the husband set aside.
In deciding the matter, the court noted that there was no fraud to be found on the part of either the husband or his father, and neither the husband nor his father had used any form of oppression, coercion, compulsion, or abuse of power to obtain the wife’s consent to the conveyance of the matrimonial home. Furthermore, there was no evidence that the wife had been dominated by the husband and no undue influence was exerted such that the contract could be set aside. Nonetheless, the transaction was unconscionable. The separation agreement was an unfair and improvident arrangement for the wife. She gave up an interest in the home worth $26,750 for nothing. The $3,725 she received covered the value of only her share of the matrimonial assets. The husband took unfair advantage of the wife in obtaining her signature. He knew that the wife was going through emotional turmoil and distress. She had had no time to review and reflect on the separation agreement. In coming to this conclusion, the court in exercise of its equitable powers held:
Even where the test of undue influence has not been met so as to vitiate consent in signing a contract, in some cases the conduct of a party in obtaining the consent may be of such an unconscionable character that a court may consider upholding the contract would perpetuate an injustice and produce an unfair result. One party may have gained an unfair advantage because of inequality in the positions of the parties arising from the ignorance, needs, or distress of the weaker person.
2. Independent Legal Advice
An example where equity has intervened to relieve a party from what would otherwise be a binding contract occurs where the party wishing to be released from the contract can show that he or she entered into the bargain in the absence of independent legal advice. This is what took place in the case of Shoppers Drug Mart Company v. Nigro. In that case, the husband arranged for a business loan to be secured against the matrimonial home. The wife was not involved in the husband’s business, nor was she aware of the particulars of its operation. One lawyer represented the husband, his company, and the lender. The documentation was drawn up by the lawyer and no one advised the wife of the importance of having independent legal advice, or fully explained the financial aspects or potential risks to her. The wife had a poor grasp of the English language but understood that she was signing a loan transaction. The parties separated 11 months after the mortgage was executed.
In this case, the court was mindful of the fact that in cases involving an unconscionable transaction, equity may always intervene to relieve a party from the contract. The trial judge held, I am satisfied that the facts here, as in Bertolo, demand the intervention of equity by the court. In the words of the Court of Appeal, to permit the lender to take advantage of the security it obtained from Mrs. Nigro in the absence of independent legal advice would be unconscionable. Mrs. Nigro is illiterate and uneducated. She was not involved in her husband’s business, and had no knowledge of the contents of the documents which she was asked to sign from time to time. She felt compelled to sign the documents by reason of the threats and violence from her husband. Even if she had had the opportunity to read the mortgage document, she would not have been able to comprehend the legal ramifications or ask questions to clear up misapprehensions, as she had little ability to understand or speak English. In addition, the solicitor represented interests which were most certainly adverse to those of Mrs. Nigro. Considering all the circumstances here, I find Mrs. Nigro may not be bound by her signature on the mortgage document.
3. Imbalance in Bargaining Power
Where there is an overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability, equity again will intervene.
In the 1978 case of Harry v. Kreutziger. H, a native Indian, living in Powell River, was considered as a mild, inarticulate person with a grade 5 education and not widely experienced in business matters. Since 1958 he had owned a fishing boat which had a Class “A” Commercial Fishing Licence attributed to it. The boat itself was of little value, but the licence was worth approximately $15,000. The reason that the licence was so valuable was that the government had instituted a policy whereby a new boat could be licensed for commercial salmon fishing only if a transfer of an existing licence from an old boat could be arranged. H. wished to replace his old boat with a new boat, and had made several attempts with various government agencies to obtain a new boat while maintaining his commercial fishing licence. In November 1973, K. approached H. regarding the sale of the boat with its licence. K. assured H. that as an Indian he would not have any difficulty in obtaining a new licence. K. gave H. A cheque for $2,000 for the sale of the boat and licence. Overnight, H. decided against the sale and had the cheque returned to K. Further meetings took place. K. Again assured H. that he would be able to get a licence for a new boat. It was finally agreed that the boat and licence would be sold for $4,500. H. later sued to have the Court set aside the sale to K. on the basis that it was an unconscionable bargain.
In deciding the matter, the court concluded that the contract should not be enforced. The court took into consideration the fact that H., “by education, physical infirmity and economic circumstances, was clearly not the equal of the respondent”.
Furthermore, the court held that H’s ignorance, coupled with pressures exerted upon him by the respondent, caused the inequality of the bargaining position. For those reasons, the court could not support the validity of the contract.
4. Knowingly Taking Advantage of Vulnerability
Where one party to a contract uses their position as a means of exploiting the other contracting party’s vulnerability, equity will not permit such injustice and will undo the bargain. For example, in the 1994 case of Robert Blackmore v. Cablenet Limited. The facts of that case were that the plaintiff was hired as a marketing representative by the defendant and was paid on a commission basis. When he was hired he was told he might be able to earn $30,000 per year. In his first year, he earned $125,000, based on the defendant’s commission structure. That structure was revised the following year, and the plaintiff earned $115,000. The defendant decided its product was selling itself and terminated the plaintiff ’s employment. On the date of termination, the plaintiff was presented with an offer of a separation allowance of $15,507, equal to just over 5 weeks wages. He took eight days to consider the offer, but spent that time in a state of shock and depression and did not seek legal advice. The defendant agreed to provide him with a letter of reference and back pay along with the separation amount, but would do so only after the plaintiff signed a letter releasing the employer from any further claims arising from the termination. The plaintiff suffered from depression following termination. He sued the defendant for damages for wrongful dismissal and mental distress.
In order to invoke equitable relief from a contract on the basis that there existed an inequality of bargaining power, it must be proven that the defending party used its position of power and influence to take advantage of the plaintiff ’s vulnerable state.
In this case the court, in deciding in favor of the plaintiff, considered the mental and financial stress under which the plaintiff was acting. After considering this factor, the court held:
The Plaintiff was confronted with notice of his termination abruptly and without warning. At the initial meeting, the Defendant presented the Plaintiff with the settlement agreement. No negotiation took place regarding the amount of settlement. The Plaintiff did not sign the release immediately, waiting eight days.
However, he was not given the back pay that he was owed, the references he was promised, nor the amount offered in severance. He was told that he would not get the severance package if he did not sign the release. He was not given any of these items until the release was signed. While the Plaintiff had the opportunity to contact counsel, there is no evidence that he did. The only advice it appears that he received was from the Labour Standards Board telling him that since he was a commission salesman, he should “take what he could get”. The facts clearly show that the Plaintiff was under a great deal of mental and financial distress. Even on the day the Plaintiff signed the release, the facts indicate that he was more concerned with keeping his job with the Defendant than protecting his rights to adequate notice. These facts show that an unequal bargaining position existed between the Plaintiff and the Defendant and that the Defendant used its position to obtain the release.
Statutory Law
In Canada, all of the provinces, with the exception of British Columbia and the territories, have enacted legislation to deal with unconscionable contracts. The province of Quebec has passed legislation to deal with unconscionable contracts in consumer transactions under its Consumer Protection Act. S. 8 reads: The consumer may demand the nullity of a contract or a reduction in his obligations thereunder where the disproportion between the respective obligations of the parties is so great as to amount to exploitation of the consumer or where the obligation of the consumer is excessive, harsh or unconscionable.
Although not specifically referenced in the wording of s. 8, such wording clearly echoes the equitable principle of inequality of bargaining power.
Unfortunately, without exception, all of the remaining provincial and territorial governments that have passed legislation regarding unconscionable contracts have restricted their application to loan transactions involving money lent. A good example of such legislation is Alberta’s Unconscionable Transactions Act. Pursuant to s. 2 of this legislation, where money is lent and “the Court finds that, having regard to the risk and to all the circumstances, the cost of the loan is excessive and that the transaction is harsh and unconscionable”, the court is empowered to “reopen the transaction, take an account between the creditor and the debtor and relieve the debtor from payment of any sum in excess of the sum adjudged by the court to be fairly due in respect of the principal and the cost of the loan”.
On the federal side, the federal government is equally remiss in failing to pass legislation that effectively addresses unconscionable contracts. The only federal legislation which remotely touches on the subject of unconscionable contracts is s. 347 of the Criminal Code, R.S., c. C-34. Pursuant to s. 347(1), “every one who enters into an agreement or arrangement to receive interest at a criminal rate, or receives a payment or partial payment of interest at a criminal rate”, is guilty of an offence punishable by imprisonment or fine. By s. 347(2), the term “criminal rate” is defined as meaning an annual rate of interest “that exceeds sixty per cent on the credit advanced under an agreement or arrangement”.
Conclusion
Given the limited application of the present federal, provincial and territorial legislation relative to unconscionable contracts, it is critical that the equitable principle of inequality of bargaining power continue to apply. Failure to do so in situations involving an unconscionable contract may have the effect of causing the court to uphold a contract that would only serve “to perpetuate an injustice and produce an unfair result”. It would therefore appear that the rules of equity still have and will continue to have a prominent and valuable place with regard to the laws of Canada.
About Donald J. . Manderscheid Q.C
