Report No. 199

Unconscionability at Common Law in United Kingdom

The medieval common law provided some form of remedy upon many informal agreements by the use of the writs of debt and detinue. The evolution of the action on the case of an assumpsit, and the action on the case of a debt also permitted certain agreements of an informal character to be sued upon at common law. The law in the U.K. about unconscionability bargains has been stated in Halsbury's Laws of England (4th Edn. Reissue, vol. 16, Equity, para 673) as follows:

"Where by reason of the unfair manner in which it was brought into existence ('procedural unfairness') as where it was induced by undue influence, or where it came into being through an unconscientious use of the power arising out of the circumstances and conditions of the contradicting parties; in such cases equity may give a remedy; but where by reason of the fact that the terms of the contract are more unfavourable to one party than to the other ('contractual imbalance'), contractual or inadequacy of consideration is not, however, in itself a ground for relief in equity, but it may be an element in establishing such fraud as will avoid the transaction, or the transaction may be so unconscionable as to afford in itself evidence of fraud.

A bargain cannot be unfair and unconscionable, however, unless one of the parties to it has imposed the objectionable terms in a morally reprehensible manner, that is to say in a way which affects his conscience, as by taking advantage of the weakness or necessity of the other."

Lord Denning M.R. was the propounder or perhaps the originator at least in U.K. of this theory in Gillespie Bros & Co. Ltd. v. Roy Bowles Transport Ltd. (1973 Q.B. 400 at 416) where Lord Denning for the first time construed an unreasonable indemnity clause in a contract and questioned: are the courts to permit party to enforce unreasonable clause, even when it is so unreasonable, or applied so unreasonably, as to be unconscious, and stated:

"When it gets to this point, I would say, as I said many years ago, '.... There is the vigilance of the common law which, while allowing freedom of contract, watches to see that it is not abused'. It will not allow a party to exempt himself from his liability at common law when it would be quite unconscionable for him to do so."

It was in Lloyds Bank Ltd. v. Bundy (1974 (3) All ER 757) that Lord Denning M.R. then enunciated his theory of "inequality of bargaining power". By virtue of it, the English Law gives relief to one who enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity.

The one who stipulates for an unfair advantage may be moved solely by his own self-interest, unconscious of the distress he is bringing to the other. One who is in extreme need may knowingly consent to a most improvident bargain, solely to relieve the strains in which he finds himself. It would not be meant to suggest that every transaction is saved by independent advice. But the absence of it may be fatal.

In the House of Lords, Lord Diplock outlined the theory of unreasonableness or unfairness of a bargain and the need to relieve a party from a contract, where the relative bargaining power of the parties was not equal. In A. Schroeder Music Publishing Co. Ltd. v. Macaulay (1974 (3) All ER 616) the song writer had contracted with the publisher on terms more onerous to him and favourable to the publisher. The song writer was relieved from the bargain of the contract on the theory of the restraint of trade which was opposed to public policy.

The distinction was made even in respect of standard forms of contract emphasizing that when parties in a commercial transaction having equal bargaining power have adopted the standard form of contract, it was intended to be binding to the parties. The court would not relieve the party from such a contract but the contracts are between the parties to it, or approved by any organization representing the interests of the weaker party, they have been directed by that party whose bargaining power, either exercised alone or in conjunction with others providing similar goods or services, enables him to say: If you want these goods or services at all, these are the only terms on which they are obtainable. "Take it or leave it."

The observations of Lord Denning in Levison v. Patent Steam Carpet Cleaning Co. Ltd. (1977 (3) All ER 490) are also useful as they reiterated that unreasonable clauses in the contract would be applied to the standard form contract where there was inequality of bargaining power. The judgment in Alec Lob Garages) Ltd. v. Total Oil GB Ltd. (1983 (1) All ER 944) support the recognition of a general principle entitling a court to intervene on the grounds of unconscionable bargains where agreements to set aside transaction on the ground of their being unconscionable bargains was not accepted.

Three elements of unconscionability which have to be invariably present before the court can interfere, were formulated as: First, one party has been at a serious disadvantage to the other; whether through poverty, or ignorance, etc.; second, the weakness of one party has been exploited by the other party in some morally culpable manner; and third, the resulting transaction has been not merely hard or improvident, but overreaching and oppressive.

The judgment hints at requiring subjective knowledge on the part of the stronger party both of the weakness of the other party, and of the fact that a bargain was obtained. The general principle has not been accepted in the English law, because the doctrine of undue influence has been considered as a preferable technique.