Inequality of Bargaining Power
Introduction
This paper will discuss the issue of whether a doctrine of inequality of bargaining power exists in English law. First this paper will discuss freedom of contract theory from ‘classical’ contract law. Second this paper will discuss the equitable principle of undue influence. Third this paper will discuss Lord Denning’s creation of the principle of “inequality of bargaining power” in Lloyds Bank Ltd. v Bundy.[1] Fourth this paper will discuss Lord Denning’s principle having little judicial support, and the court in Pao On v Lau Yiu Long.[2] Fifth this paper will advance examples in statute and case law where parliament, has undertaken the position of placing restrictions on freedom of contract to protect victims of inequality of bargaining power. Lastly this paper will conclude its findings.
Freedom of contract
In the nineteenth century and the early parts of the twentieth century “classical” contract law advocated the theory that the law of contract has as its foundation the idea of “freedom of contract” which focuses on parties’ self- sufficiency and founded upon the core ideology of the individual, the belief in the creative power of the individuals will and the constrained task of intervention for both the court and the state. The classic contractian school of thought opines the relative barging strength of the parties to the contract is not something which should normally fall into the courts inquiry. Rather the the superiority of bargaining power of one of the parties is for the market alone to rectify.[3] One argument that can be raised is that there has been a shift in the protection in the law from “freedom of contract” to a notion of “contractual justice”, this is becoming apparent in many areas of contract law, even though it is happening slowly.
Undue influence
Judges tend to not intervene with respect to contracts. But on the other hand those entering into contracts should be able to maintain assurance that the terms of that agreement will be followed in which the other party will not be exploited. One such instance of intervention by the court is seen in undue influence. Ewan McKendrick argues the protection of undue influence is a device of equity.[4] “Actual” undue influence is where there has been the use of illegitimate pressure which can be compared to a type of duress but the effects are further reaching, it is a form of cheating. The doctrine of “presumed” undue influence is where the innocent party has been taken advantage off after he/she has placed his/her trust and confidence in someone. The ingredients for presumed undue influence are (1) a relationship of trust and confidence and (2) the transaction complained for must not be explainable as normal motives as people would normally act.
Lord Denning in his quest for justice when looking at undue influence linked together the idea of “unfairness”, “protection against improper pressure” and “inequality of bargaining power” in the case of Lloyds Bank Ltd. v Bundy[5] arguing that English law should relief people who entered in a contract; (1) without independent legal advice or (2) entered into contract on terms which are very unfair; (3) of transfer property; (4) for a consideration which is grossly inadequate; and (5) when their bargaining power is seriously impaired. This has created a debate around the relevance of unconscionability and its link to inequality of bargaining power and the extent to which the courts will set aside a contract on these concerns.
Inequality of Bargaining Power
In Lloyds Bank Ltd. v Bundy[6] the Defendant mortgaged his farm to the Claimant to raise money for his son’ business and on failing his mortgage payments, the bank began foreclosure proceedings. The Court of Appeal found undue influence since there was a long-standing relationship of confidentiality and trust between Defendant and the Claimant (or rather the bank manager) and P knew that the Defendant could not afford to take out the mortgage and make the repayments. Lord Denning felt the inequality of bargaining power was the rationale for unconscionable bargains, duress, and undue influence. Gathering all these threads together, he opined the law:
“gives relief to one who, without independent advice, enters into a contract upon 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, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other.” [7]
In Bundy, there was a fiduciary duty between the Defendant and Claimant, the consideration moving to the bank was grossly inadequate, the bank failed to advise the Defendant to get independent advice. The Defendants’ care for his son weakened his bargaining position and therefore the agreement was to be set aside. However in this case the principle is wrong, the case falls within class 2B of undue influence. The majority of Court of Appeal said that the case was based on 2B of undue influence. Eric Sachs LJ held that there is no exhaustive list of relationships to which undue influence is confined it remains fact dependent.
There is an American case which highlights a similar or equivalent doctrine. The case of Williams v. Walker-Thomas Furniture Co[8] termed the issue of inequality of barging power as of one “unconscionability”. Indeed Capper recognises that the doctrine unconscionability and inequality in the bargaining positions of the parties causes a transactional imbalance. It further argues there are elements of both in an undue influence type case. He further opines for the two doctrines to be merged into one.[9] This begs the question was Lord Denning wrong to identify inequality in the bargaining positions of the parties as being a ground to intervene?
Rejection of a Principle of ‘Inequality of Bargaining Power’
Lord Denning’s principle has received little judicial support and the court in Pao On v Lau Yiu Long [10] questioned whether there was any need for such a doctrine. Lord Scarman said the agreements were not voidable solely because “they had been procured by an unfair use of a dominant bargaining position”.[11] Lord Scarman giving the Privy Council’s decision firstly spoke about the question of past consideration. Understanding whether consideration can be shown to be wrong due to inequality of bargaining position was rejected outright:
“Their Lordships’ conclusion is that where businessmen are negotiating at arm’s length it is unnecessary for the achievement of justice, and unhelpful in the development of the law, to invoke such a rule of public policy. It would also create unacceptable anomaly… It is unnecessary because justice requires that men, who have negotiated at arm’s length, be held to their bargains unless it can be shown that their contract was vitiated by fraud, mistake or duress… Such a rule of public policy as is now being considered would be unhelpful because it would render the law uncertain. It would become a question of fact and degree to determine in each case whether there had been, short of duress, an unfair use of a strong bargaining position.”
A further rejection of Lord Denning’s principle came in National Westminster Bank v Morgan.[12] In this case a couple were joint tenants and owners of a house. The house was mortgaged to a building society. The husband’s business was failing and he could not make the mortgage payments. The building society started possession proceedings and the husband sought alternative finance from the bank. The bank manager came to see the couple at home to have the relevant documents signed by the wife, who did not in fact take independent legal advice. The husband was present at the start and the wife then insisted she talk to the bank manager privately. She told the bank manger that she was concerned about her husband’s business ventures and did not want a legal charge over the house to cover his business liabilities. The manager told her that the legal charge only covered the refinancing of the mortgage and did not extend to the liabilities of the husband’s business. This was incorrect. When they failed to make the mortgage repayments, the bank sought possession. The husband died and his widow appealed against an order for possession on the basis of the wrongly sold mortgage and the presence of undue influence.
Lord Scarman wanted to highlight that undue influence needs the victimisation of the innocent part by the other. He said the belief of influence needs to be elevated by a manifestly detrimental contract or agreement entered into with a person in a position to govern the other. Lord Scarman said the relationship was purely one of a commercial nature and not one of “trust and confidence”. There are many relationships where one party relies on the other closely, but does not lead to presumption of undue influence e.g. husband and wife. Lord Denning was wrong to say that the law grants relief where there has been an “inequality of bargaining power”. This is because undue influence can also cover cases of gifts, where there is no bargaining. If Lord Denning was right (that there has to be unequal bargaining positions and therefore there has to be a bargain) undue influence could not cover gifts, which would be unfair. Bargaining power inequality is relevant in determining whether there has been undue influence, but is not the basis of the principle. Lord Scarman went on to state regulating unequal bargaining power is the job of parliament and has been undertaken by various pieces of legislation. Lord Scarman referred to the various pieces of legislation such as the Consumer Credit Act 1974 and Insurance Companies Act 1982 to demonstrate his view.
Legislation
One example used was the Consumer Credit Act 1974, ss 137–139. Under section 137(1) if a court finds a credit bargain extortionate, it can reopen the credit agreement to “do justice between the parties”. Moreover, under s.138 (1) it is extortionate where either requires the debtor/his relative to make “grossly exorbitant payments” or “grossly contravenes the ordinary principles of fair dealing. Under s.138 (2-5) requires evidence to determine if it is extortionate. This will include Interest rates, any relevant considerations, and attributes of debtor, the degree of risk accepted by debtor, relationship of debtor to creditor and whether or not a cash price was stated for the a service/goods in the bargain.
Under section 139(2) in reopening an agreement to relieve the debtor of as sum exceeding what is “fairly due and reasonable”, a court can: direct accounts to be passed from one party to the other; set aside a whole or part of an agreement; require a creditor to repay a whole or part of the sum paid under the agreement; and order the return of the surety/security. This demonstrates that the law is taking a more consumer welfare approach where consumer contracts are regulated closely and commercial contracts, although competitive, must are subjected to far more regulation than market individualism.
Conclusion: was Denning wrong?
Slayton argues:
“Lord Denning is not only a reformer; he is a reformer employing a distinctive and effective technique, remarkably similar to the civilian technique for reorganizing and changing the law. Lloyds Bank v. Bundy is but the latest example of this great Judge at work.”[13]
It can be argued that judges might be expected to care about fairness but it has been shown that other judges reject notions such as “inequality of bargaining power”. In essence Lord Denning was right a party should be prohibited from exploiting the apparent weakness of another party’s bargaining situation and parties should be taken to have a relationship that will not lead to one exploiting the other. But Lord Scarman was also right this is a job for the legislature. This notion has been correctly upheld in English law under the “doctrine of unconscionability”. This doctrine seems to have been extended and not to different to the principle formulated by Lord Denning in Lloyds Bank Ltd. v Bundy.[14]
Bibliography
Atiyah, “Economic Duress and the Overborne Will” (1982) 98 LQR 197
Atiyah, Patrick Selim, The rise and fall of freedom of contract, Vol. 1, (Oxford University Press, Oxford, 1979)
Birks & Yin, “On the Nature of Undue Influence”, Ch 3 in Good Faith and Fault in Contract Law (eds Beatson & Friedmann, 1995)
Capper, D., “Undue influence and unconscionability: a rationalisation” (1998) 114 L.Q.R. 479
Cartwright, Unequal Bargaining, (Oxford: Oxford University, 1991)
Chen-Wishart, “The O’Brien Principle and Substantive Unfairness” [1997] CLJ 60
McKendrick, Ewan, Contract law: text, cases, and materials, (Oxford University Press, 2014)
Thal, “The Inequality of Bargaining Power Doctrine: The Problem of Defining Contractual Unfairness” (1988) 8 OJLS 17
Tiplady, “Concepts of Duress” (1983) 99 LQR 188
Slayton, Philip, “The Unequal Bargain Doctrine: Lord Denning in Lloyds Bank v. Bundy” (1976) 22 McGill LJ 94.
Footnotes
[1] [1975] Q.B. 326
[2] [1979] UKPC 17
[3] Atiyah, Patrick Selim, The rise and fall of freedom of contract, Vol. 1, (Oxford University Press, Oxford, 1979)
[4] McKendrick, Ewan, Contract law: text, cases, and materials, (Oxford University Press, 2014)
[5] [1975] Q.B. 326
[6] [1975] Q.B. 326
[7] [1975] Q.B. 326
[8] 350 F.2d 445 (C.A. D.C. 1965)
[9] Capper, D., “Undue influence and unconscionability: a rationalisation” (1998) 114 L.Q.R. 479
[10] [1979] UKPC 17
[11] McKendrick, Ewan, Contract law: text, cases, and materials, (Oxford University Press, 2014)
[12] [1985] AC 686
[13] Slayton, Philip, “The Unequal Bargain Doctrine: Lord Denning in Lloyds Bank v. Bundy” (1976) 22 McGill LJ 94
[14] Atiyah, Patrick Selim, The rise and fall of freedom of contract, Vol. 1, (Oxford University Press, Oxford, 1979)
