Inequity in Bargaining Contracts - Assignment Example

Contract law Assignment Introduction: The net result of the events that have occurred in Jack’s case is that he has been made liable for all the debts incurred by his employer Karen’s Company and is about to lose his home as a result of the bank’s lien on his property. Jack appears to be placed in an inequitable bargaining position as compared to the bank and this is the foundation upon which any claim can be based. The major legal issues that arise in this case are therefore (a) inequality in bargaining position (b) unjust enrichment by the bank and (c) lack of proper consideration and estoppel. The legislation that may be relevant is the Unfair Contract Terms Act of 1977, the provisions of which may apply for Jack’s contract with the bank. Analysis: The traditional laissez faire approach was based upon the free will agreement of the parties and voluntary assumption of contractual obligations. However the laissez faire approach is being superseded by a transformative thesis, which has shifted the focus from an individual-centered approach to a more welfare based approach.1 This is the result of the recognition of the fact that “equality in bargaining power [existing between parties to a contract] was nothing more than an elaborate fiction.”2 In cases where such an inequity in bargaining position has led to an unfair outcome, the Courts have not hesitated to interfere and set such contracts aside3. Can Jack’s contract with the bank also be set aside on such a basis? In the case of Earl of Aylesford v Morris the Court held that if an unconscientious bargain resulted from the contract in question, then the bargaining position of the parties would be a relevant factor and it would be up to the stronger party to demonstrate that the contract was “fair, just and reasonable.”4 The case of Cresswell v Potter5 established the importance of possession of relevant knowledge about a particular transaction in order to render a particular bargain equitable. Eisenberg has pointed out that in complex transactions – such as Jack’s financial transaction with the bank, an individual may sometimes lack the “aptitude, experience or judgmental ability” to make an intelligent, well informed decision.6 This lack of transactional knowledge may strongly influence the outcome of the transaction and if a more welfare-based approach is utilized, an imbalance may exist as far as Jack’s interests are concerned in his ability to contract from a well informed position and thereby provide grounds for setting aside the contract. Jack is in an inferior bargaining position in several aspects. First of all, being Karen’s employee has automatically placed him in an inferior position as compared to her. Secondly, it is also clear that his transactional knowledge is limited, since he has actually signed an agreement with the bank that makes him liable not only for the additional loan that Karen has taken, but also for her previous debts, thereby placing the bank in a position where it is taking advantage of Jack’s property to recover all its loans from Karen. An unconscientious bargain has resulted for Jack and the question of whether or not the bank can demonstrate that the contract was “fair, just and reasonable” arises in this context. A contract can be set aside, if it can be demonstrated that one party has knowingly, taken advantage of the other party’s inferior bargaining position.7 In this case, the bank may have done so and profited unjustly, as detailed below. One of the strongest defenses that the bank can offer is the fact that it has advised Jack to seek legal advice. The outcome of the Aylesford case also suggests that if the plaintiff has been advised to seek independent legal advice, it could render the contract equitable. The bank may therefore claim that Jack has entered into the transaction of his own free will and has had the benefit of advice from a lawyer. However, the lawyer in this case was one recommended by the bank, thereby placing it in a position of unfair advantage which has resulted in its unjust enrichment. The contract that Jack has made with the bank was the result of a representation by Karen that Jack’s home was required as security for the additional loan amounts that she was borrowing. However, the actual contract has made Jack responsible for all the losses Karen has sustained thus far, including those incurred before Jack’s home was used as security. A bank is placed within a special relationship with a customer or borrower, it assumes a position of knowledge about the borrower which could give rise to an inequitable balance in the bank’s favor, giving it a superior knowledge that could be used unscrupulously8 and thereby undermining the free will principles of formation of contract. In the case of the transaction with Jack, the bank was aware that Karen was already in a position where she had over extended her overdraft facility. It had a thorough and intimate knowledge of Karen’s poor financial standing and the extent of the financial difficulties that her company was facing. Having already incurred losses on monies advanced on overdraft to Karen, the bank is now placed in the position where it can take care of its own interests and recover its loans by seizing Jack’s property, via a vis warning Jack of the consequences of his entering into such a transaction. In this instance, the bank has clearly placed its own interests and its recovery of its monies advanced to Karen over the interests of Jack, since it was operating from a position of strength in terms of its knowledge about Karen’s finances. While it had initially informed Karen that the additional security would be required only for the additional amounts being borrowed, it has however placed a lien on Jack’s property for the entire amount of Karen’s losses, thereby clearly looking out to gain from its superior knowledge, while Jack was in a position of disadvantage and did not receive independent legal advice.9 The issue of when a fiduciary duty will arise on the part of a bank was best clarified by Mollet J in the case of Mothew: “A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit…”10 The defining case in this context is that of Hedley Byrne11 where the issue under consideration was the losses that Plaintiff incurred due to the defendant’s negligent giving of advice. Jack is also likely to incur substantial losses from this transaction, therefore the Courts are likely to closely examine whether the bank has been negligent in its duties. The Hedley case set up new standards of duty of care by professionals on the basis that there was an implied “assumption of responsibility” from one party to another, as also established in the case of Lloyds Bank Ltd v Bundy12. Lord Browne Wilkinson, in the case of Barclays Bank v O’Brien13 emphasized the duty of inquiry that was also imputed to a bank in order to ensure that a transaction is equitable. Therefore, in this case also, the bank was put on a duty of inquiry to ensure that Jack understood the full implications of his actions and it was necessary for the bank to suggest an independent lawyer who could look out for Jack’s interests. However, the lawyer used by Jack is one the manager has recommended. Therefore, there is a potential conflict of interest that arises, since the lawyer will not be inclined to fully highlight to Jack, the dangers of offering his home as security, because he also deals with the bank and will be interested in maintaining his relationship and business with the bank. Therefore, he is likely to look out for the bank’s interests rather than Jack’s. Karen and the bank may try to claim that Jack entered into the contract of his own free will and will full knowledge of the consequences, thereby making the contract enforceable. They could also contest whether unequal bargaining position constitutes valid grounds, in accordance with the views of Lord Scarman who questioned “whether there was today any need for any general principle affording relief” in such cases.13a But the issue of disadvantage is relevant in this case, especially so when there is a relationship between the parties which places one in a position of ascendancy or influence over the other, which is taken advantage of by the party in question.14 In fact, Karen by virtue of her position as Jack’s boss may be seen to be in a position to exercise undue influence in Jack’s decision to offer her his flat as security for her overdraft facility with the bank. Thus, it raises the question of manifest disadvantage to Jack from this contractual transaction. The greater the level of disadvantage that is perceived, the greater the level of explanation that will have to be tendered before the assessment of a manifest disadvantage in the contract is displaced.15 On the basis of the above, Jack may be able to avoid his contract with the bank. There are also other issues that rise in this case, such as the issue of consideration. The exchange between two parties is based upon the principle of “consideration” which Stone defines as “what one party to an agreement is giving, or promising in exchange for what is being given or promised from the other side.”16 When no consideration exists, there can be no contract. Jack is providing his home as security, however in return he receives virtually no consideration, since the only thing he gains is his job, which he already has. He has gained no “right, interest, profit or benefit” that offsets the “forbearance, detriment, loss or responsibility” suffered by the other party17 – Karen and the bank. On the basis of the grounds raised above, and especially in view of the fact that there is no effective consideration, estoppel may also be possible to prevent the bank from taking over Jack’s home. For instance, in the case of Emery and Another v UCB Corporate Services Ltd18, UCB was estopped from demanding full repayment on the loan that the Emerys had taken. But in the Court of Appeal, Peter Gibson LJ stated that the criterion in considering when estoppel would be valid was to determine “whether it would be inequitable for the promisee to be permitted to act inconsistently with his promise.”19 In Jack’s case however, it may be noted that the reverse case is true – it would in fact be equitable if he is allowed to act inconsistently with his promise to allow the bank to take over his home and if the bank is estopped from taking over his property. Thus, on the basis of the above, Jack’s best course of action may be to file suit on grounds of inequality of bargaining power, for which relevant legislation will be the UCTA 1977 c 50, or the Consumer Credit Act 1974, c.39. He can also seek to avoid the contract on grounds of lack of consideration and estoppel. Additionally, he can also contest the contract that the bank encouraged him to sign, standing surety for all of Karen’s loans rather than the additional loan only, on the basis of an unfair advantage gained by the bank through the transaction.10 This case highlights the need to refine the legislation in the area of inequity in bargaining contracts, especially in those executed by financial institutions such as banks and credit cards and to ensure that the protection for consumers that is provided through the UCTA be extended on a more wide ranging basis. There is also a need to clearly define the scope of consideration in contract through the scope of legislation, so that such transactions as Jack’s are declared invalid due to lack of consideration. Moreover, existing precedent has not successfully made the scope of estoppel a clear one because there are conflicting precedents available in different cases and this is one area that must be clarified. Bibliography Cases: * Barclays Bank v O’Brien [1993] 4 All ER 417 * Bristol and West Building Society v Mothew (1998) Ch 1 * Cresswell v Potter (1978) 1 WLR 255 * Currie v Misa (1875) LR 10 Ex 153 (HL) * Etridge (no: 2) [2001] 3 WLR 1021 * Earl of Aylesford v Morris (1873) 8 Ch. App 484 at 495 * Emery and Another v UCB Corporate Services Ltd (2001) EWCA Civ 675 * Fry v Lane (1880) 40 Ch D 312 * Groob v. Key Bank, 155 Ohio App. 3d 510, 801 N.E. 2d 919 (1st Dist. 2003) * Hitchman v Avery (1892) 8 T.L.R. 698 * Hedley Byrne v Heller (1963) 2 All ER 575. * Lloyds Bank Ltd v Bundy(1975) QB 326 * National Westminster Bank plc v Morgan (1985) AC 686 * National Westminster Bank plc v Morgan (1985) AC 686 at 703-707 Books/Articles: * Atiyah, P.S., 2002. An Introduction to the law of Contract 5th edn Oxford: Clarendon Press at pp 14 * Cartwright, J, 1999. Unequal bargaining: A study of vitiating factors in the formation of contracts. Oxford: Clarendon Press, pp 197 * Collins, H, 1993. Ascription of responsibility for contractual obligations In Wilhelmsson, Thomas (eds), 1993 Perspectives of Critical Contract law Aldershot: Dartmouth at pp 293 * Eisenberg, M.A., 1995. The Bargain principle and its limits 95 Harvard Law review 741 at 763 * McKendrick, Ewan, 2000. Contract Law 4th edition, Palmgrave Law masters at pp 360 * Stone, R. Modern law of Contract, 5th edn. Cavendish Publishing, pp 74. Legislation: * Unfair Contract Terms Act of 1977 * Consumer Credit Act 1974 Read More