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Report No. 199

Amadio's case

In Commercial Bank of Australia Ltd. v. Amadio (1983), all the five Judges of the High Court confirmed the existence of an equitable jurisdiction to set aside contracts on the basis of unconscionable dealings.

The facts of the case are: Two elderly Italian migrants to Australia who were not familiar with the English Language, executed, at the request of their son, a mortgage in favour of a bank over their land for securing an overdraft of a company which the son controlled. The son had represented to his parents that the mortgage would be limited to $50,000 and for six months.

The bank did not disclose to the couple that the bank had been selectively dishonoring the company's cheques, and that they had agreed that the overdraft was to be reduced and cleared within a short time. The couple signed the mortgage believing it to be for an amount of $50,000 and for six months, but the documents actually signed by the couple included a guarantee containing an 'all moneys' clause, securing all amounts owing or which might be owed by the company to the bank. The bank was aware that the couple was misinformed about the instrument.

The majority found that the Amadios were under a special disability, were not given full information about the extent of the guarantee and were ignorant about the perilous financial state of the company. Their son, who could have assisted them, had deceived them. Applying the objective test, the majority held that the bank was aware of the need of the Amadios to have independent advice, and in proceeding with the transaction in the light of this knowledge, the bank had acted unconscionably. The principle of unconscionable dealings which was applied was summarized as follows:

"The jurisdiction is long established as extending generally to circumstances in which: (i) 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 (ii) the disability was sufficiently evident to the stronger party to make it prima facie unfair or 'unconscientious' when he procures, or accepts, the weaker party's assent to the impugned transaction in circumstances which are shown to have existed and an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable."

Under the Amadio approach, the weaker party emphasised mainly to the manner in which the transaction was concluded. This is the procedural unconscionability in which a party must show that the stronger party acted unconscionably. On the other hand, the questions of substance, namely, the nature of the terms, would be concerned at the second stage of the proceedings when the onus is cast on the stronger party to show that the transaction was 'fair, just and reasonable'.



Unfair (Procedural and Substantive) Terms in Contract Back




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