#19855 - Inequality Of Bargaining Power Debates - Contract Law

3 ‘In his minority judgment in Lloyd’s Bank Ltd v. Bundy (1974) Lord Denning M.R. persuasively suggested that the equitable doctrine of undue influence forms part of a wider principle of “inequality of bargaining power”. His comment concerning undue influence is an important insight. And his identification of such a wider principle deserves to be considered by the United Kingdom Supreme Court.’
Discuss.

Two part essay – (1) does undue influence form part of inequality of bargaining power, and (2) is there evidence of inequality of bargaining power existing as a freestanding doctrine in contract law.

What did Denning say?

In Lloyd’s Bank v Bundy, Denning said there are exceptions to the rule that no one can get out of the terms of a harsh transaction. This is where the one party is so strong (in terms of bargaining power) and the other so weak that as a matter of ‘common fairness’, it is not right the ‘strong should be allowed to push the weak to the wall. He deduced this from 5 categories of cases:

1. Duress of goods – urgent need of the goods by the weaker party as opposed to the possession of goods by the stronger.

Duress of goods is where you withhold someone’s goods unless they pay.

2. Unconscionable transactions. A few variations: see notes in ‘Undue Influence and Unconscionability’ notes.

Denning claims this is a general principle of ‘unconscientious use of a power by a stronger party against the weaker’.

3. Undue Influence

Both actual and presumed

4. Undue Pressure

Bit of a dodgy category. Denning gave examples of Williams v Bayley and Ormes v Beadel. John Cartwright these are characterizable as undue influence cases. D & C Builders v Rees is perhaps a more convincing example, but would now fall under economic duress.

5. Salvage Agreements

This is where a ship is distressed and a rescuer agrees to rescue it for an extortionate fee. The court will enforce this only if fair and just: Akerblom v Price; The Port Caledonia. Treitel deals with The Port Caledonia under unconscionability – it’s again dubious category (5) is freestanding.

Denning thought all 5 rest on inequality of bargaining power. We give remedy to those who enter a contract without independent advice on very unfair terms for a ‘grossly inadequate’ consideration, when the bargaining power is grievously impaired by reason of his own needs or desired, or ignorance, alongside undue pressures.

‘Undue’ does not mean ill-intent on the pressure. Nor must the will of the weaker party be overcome – he may fully know what he’s doing: relieving himself of the situation he’s in. (this perhaps rests on the premise that duress vitiates consent, which is debatable).

‘Inequality of bargaining power’ suggests the court will give redress when there is only a dynamic of unequal bargaining strengths. This is not so – the stronger party must abuse that position. This seems to be consistent with the idea of unconscionable bargains – courts have emphasised the need for unfair conduct linking the inequality of the position with the unfairness of the bargain. Denning’s statement does not doubt this.

As such, you can argue Denning does not really extend us that far. There is still the concept of ‘undue’ pressure – what sort should vitiate a contract? Illegitimate advantage-taking underlies some other areas – all of duress: goods, person, economic involves some illegitimate pressure exerted.

Lord Scarman attacked the idea of an underlying principle in National Westminster Bank v Morgan. He thought undue influence had developed past Denning’s principle. He also noted undue influence can apply in gifts, which don’t involve a bargain, so there’s no point talking about inequality of bargaining power. Cartwright thinks this might be a misreading of Denning – he thinks Scarman is viewing Denning’s principles solely as involving the vitiation of contracts by virtue of inequality of bargaining position of the parties, but the key element in Denning’s statement is the link between unequal position and the unfair bargain: we need abuse of the position.

In Pao On v Lan You Long, Scarman denied any public policy ground for negating contracts on the basis of unfairness of bargaining positions. He thought it unnecessary because justice requires men, who have negotiated at arm’s length, be held to their bargains except for fraud mistake duress. Such a public policy rule would make the law uncertain, and require courts to conduct a factual case-by-case analysis.

Thal – Problem with Defining Unfairness

A doctrine of unequal bargaining power is irreconcilable with freedom of contract when we don’t know the former’s scope.

Freedom of contract says we can’t set aside a contract just because it’s unfair. Denning creates an exception. Guest and Treitel say Denning’s formulation is too bold, with Guest saying it is not a general principle of contract law. Guest and Treitel correctly observer the inequality of bargaining power doctrine is without much support in law. Lord Scarman in National Westminster Bank v Morgan said the fact an unequal bargain is unequal will never on its own form an equitable principle. But, as Thal notes, the fact the courts have rejected the doctrine does not mean it plays some part in the background, where fairness might be a consideration when looking at validity. In NatWest v Morgan, the HL denied relief on the ground the transaction was not substantially unfair. Collins has suggested this means the courts have continued to make evaluations of fairness in the course of applying duress and undue influence.

Thal thinks the only thing revolutionary about the inequality of bargaining power is that it explicitly incorporates fairness into the determination of contractual validity. ‘the rejection of the inequality of bargaining power doctrine is no more than a smokescreen’ to cover the relevance of fairness.

CA case of Avon Finance v Bridger. Denning said unequal bargaining power, abuse of that position resulting in unfair bargain. Brandon and Brightman LJs took the traditional approach by looking at undue influence. Clearly there was a difference in agreement as to the relevance of the unequal bargaining positions. But all three judges assumed the validity of a contract can be challenged on the ground of unfairness.

In The Atlantic Baron, shipbuilders pressured the owners to accept a price increase. This was decided on duress. Scarman in Pao On said coercion is about vitiating consent. Atiyah says no – the real issue is whether the pressure is legitimate, or fair. Beale points out Scarman determines whether consent was vitiated by referring to the effectiveness of alternate remedies. This can only be used to determine whether it would be fair to conclude consent is vitiated.

In undue influence, there has been no beating about the bush and courts have moved straight on to defining what kind of influence will be regarded as so unfair as to invalidate contract. In Earl of Aylesford v Morris, Lord Selbourne said it’s sufficient for undue influence if the parties meet… to give the stronger party dominium over the weaker. Thal concludes judicial hesitation to accept Denning doesn’t refute the idea that fairness is an important consideration in determining contractual validity, no matter how well that element has been disguised.

Is Inequality of Bargaining Power too Wide?

Thal suggests there is a way to make it work. It will be structed by case-by-case, but will go through a framework to guide judicial reasoning as essential to the ordered continuation of this process. Denning said:

“By virtue of it, English 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 and desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on hum by or for the benefit of the other”.

Thal reads this as Denning suggesting that the unfairness of the outcome is the trigger for the inequality of bargaining power. As Cartwright has demonstrated, this is wrong. The elements are (a) unequal positions, (b) abuse of that position, leading to (c) unfair outcome. Therefore Thal’s objection that an unfair outcome cannot fairly be defined is, although still relevant,...