A contract is said to be unconscionable if there is an unfair dispute between a dominant and weaker party in the contract, with the dominant party taking advantage of the weaker party’s “special disability”.  For example, an elderly, illiterate, poorly educated, drunk or disabled person might be considered to have a “special disability” where a contract is concerned.

The case of Commonwealth Bank v Amadio [1983] HCA 14 (Amadio) is a good illustration of an unconscionable contract.  In that case the Commonwelath Bank attempted to enforce loan documents against an elderly couple who had provided personal guarantees for their son’s business.  The Amadios, who did not understand English and therefore did not understand the effect of the guarantee they signed.  The court set aside the guarantee, holding it was unconscionable to enforce the terms of the guarantee against the Amadios, particularly because the bank was aware of their English limitations and their age and infirmity and did not take steps to ensure that they were properly advised in relation to the transaction.

Unconscionable contracts can be enforced both by common law (in the courts using precedents as in the Amadio case) and there is also some statutory protection in the Australian Consumer Law (formerly the Trade Practices Act 1974) (ACL).

Sections 20, 21 and 22  of the ACL protect consumers from unconscionable contracts.  Section 20 provides that a corporation must not engage in conduct that is unconscionable “within the meaning of the unwritten law”.  Section 21 of the ACL goes on to protect consumers in relation to the supply of acquisition of goods or services from a person (other than a corporation).  Finally, section 22 of the ACL spells out a number of factors the court must consider when it determines whether conduct is unconscionable.  These factors include, amongst other things:

  • Whether the weaker party (or consumer) understood the documents relating to the transaction;
  • Whether the weaker party was subject to unfair tactics or undue influence; and
  • Whether the parties acted in good faith.

Conclusion

If you require any assistance in identifying whether unfair terms as unconscionable conduct exist in your contract, please call LegalVision on 1300 544 755. Our contract lawyers have extensive experience in drafting and reviewing personal and commercial contracts.

Emma Heuston

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